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Pivot Week
The stock market showed a significant distribution day on Tuesday, as big volume selling dominated the day. The SPY ETF showed its biggest volume day since April with 321 million shares exchanging hands, with approximately 80 million shares traded between 10:40 and 11:40 AM, where the selling really picked up as the support trendline connecting July and August lows experienced a breakdown. SPY's volume's 20DMA is around 189 million shares, and Tuesday showed a 70% relative increase in volume. This is highly suggestive of big players dumping shares, which puts the 30-1 insider sale-purchase ratio last month (and 62-1 ratio in its last week) in even more perspective.
Tuesday's big volume divergence from most of the rally since March is evident, being the biggest differential from the 20DMA since the beginning of the January-March 2009 sell off, and is analogous to distribution days in late May/early June 2008, early September 2008, and early-mid January 2009. The SPY chart below has volume with its 20DMA and the line defining two sigmas away from 20DMA volume. Tuesday was a marked exception to the trend since March, and especially since the 87.5 breakout in May, as volume on Tuesday was well above two standard deviations greater than the 20DMA. The analogues provided above (late May/early June 2008, early September 2008, and early-mid January 2009) also show volume spiking well over two sigmas over the 20DMA and beginning a reversal in price.
Below is a chart of SPY with volume and standard deviation of volume. As volume contracted since March (and especially since the May breakout of S&P 875), volume's sigma has stayed in a tight range, with no big volume breakout days with low volume consolidation days or any of those bullish market internals. Instead, the market has rallied with no volume confirmation. Fall 2007, summer 2008, and fall 2008 also show similar patterns. The difference for the current sigma tightening is in its length, occurring over several months, which makes sense in the context of the paradigm shift in trading to almost exclusively momo-chasing daytrading. The three comparable situations in std dev of vol in the chart below led to volume expansion and price sell-off, with one or two big volume distribution days bearing the bad omen of what's to come. Tuesday's volume expansion shot volume sigma up too, and it appears to be ready to surge up again. That implies volume expansion and price contraction, unless volume comes in big on the buy-side, after a greater than 50% rally in equities. Accelerating insider sales as time has elapsed during this rally don't suggest the volume will be on the bid. At least to me.
Big volume down days in the midst of low-volume rallies are highly suggestive of major distribution, and in the context of current market internals/illiquidity, insider sales/purchase ratios, and of course the general state of the economy, Tuesday's expansion of volume on the downside is a harbinger for forthcoming bearish price action.
Volume greatly expanded on positive price movement, however, in gold. The day after the big volume sell-off in equities, gold broke out of its symmetrical triangle (which I have been posting frequently) on massive volume expansion, as shown below in GLD's chart. Lots of gold miner equities also surged. The big money appears to be leaving equities for safe havens. Treasuries have been on the move up since June, and now gold is breaking out, approaching its formidable $1000/oz resistance, from where it should go to the moon.
I'm short-term deflationist and long-term inflationist, and have been touting the short financials/long precious metals and short oil/long gold trade for a while now. Volume seems to be backing that thesis.
This week showed some broken trendlines in stocks, volume coming in on the downside, a breakout in gold prices with volume confirmation. September is historically the worst month for stocks, and its first week in 2009 is suggesting more of the same.
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What you say is what I see coming too. I have placed my portfolio bets accordingly weeks ago, and have endured the restless urge to capitulate and reverse, but for my unwavering belief that, despite the market's ability to remain irrational longer than you can remain solvent, that reality will hit home sooner or later this fall. It simply has no choice. The end of QE may be another trigger worth contemplating, as an event that will dictate new Fed strategies to bolster the Treasuries market and ensure they remain a prime investment globally and domestically. The lure of the sheltered port is not evident on a sunny day at sea.
Well done and it's about time that investors wake up to the fact that "price can be put up without volume, but not sustained." (Edwards & Magee) Your statistical tools on volume show what can be added to the analysis of price/volume patterns & trends. This rally is proving itself to be a typical bear market rally (rising wedge) with distribution to all the CNBC listeners aka bagholders.
This market is gliding along but is at major risk from a black swan.
Really liked your summary... you are very readable... and it helps that I am in agreement with your thoughts...
Good analysis. However, what you all seem to be failing to take into account is the simple fact that "they", apparently, can now do whatever they want with equities. They can make 'em go up, they can make 'em go down. Look at what is going on with AIG - moves like a penny stock with a 4 Beta. If they can make AIG go from 8 to 54 in a little over a month, they can do whatever they want with the rest of the market. It's a whole new game.
They might be able to get it down to 955 on the S&P, but that's about it. S&P will finish the year over 1100. Period.
i think you should include the e-mini volume. Tues was the largest day of the entire sept future cycle.
I'm looking for top tax rates to spike higher for as long as it takes to pay down public debt via the combo of inflation and taxes and would expect the S&P to continue to erode away because of it, also adding the draw down of savings from boomers retiring and we should be able to test the 300 range in the next 10 to 15 years.
Thank you for posting that. Good stuff.
Thanks for a helpful, well documented article.
Lots of talk about bonds & gold moving up together as a move to safety. A move into gold stocks, esp. the little guys is no move to safety. Just doesn't wash. The juniors had lots of voloooom too. whoosh...
I think if you go back and actually look at what took place it was ~50k delta driven options strategies that triggered the sell off in O/n futures in Germany Wednesday morning. The layout of the options strategy largely suggests that this is instutional investors taking hedged positions instead of a change in the direction of the equity markets. If you look at the actual levels of acc/dist. accross all market indices you can see a different picture being painted, I can see how looking at just the SPY would be misleading.
I should add, what is notable or noteworthy is the way that the upticks in the VIX have all been crushed down recently.