Special Risk Capital Management LLC

Investors on Vacation ? looks Like It ! December 18, 2011

This is a busy time of year, so I’m going to keep it short, but a little bit more “technical”.  What I’m studying is the concept(s) of how Volume confirms Price.  Yes, “Only Price Pays” (as the saying goes), but volume gives us a clue as to how strong the price action is.

Case in point is even though price increases substantially if volume action does not support it, the advance will likely be short-lived.  Similar with price decreases.  One thing that I learned years ago was the phrase “Where are the Buyers . . and Where are the Sellers ?”.  Price levels, especially those associated with significantly high or low volumes tell us whether the Buyers or Sellers are coming in with strength & conviction.

Let’s get to the point and look at the SPY (the ETF representing the S&P 500 index).  Double click on chart to enlarge it.

My interpretation of this is fairly straight forward.  The top chart attempts to show days where we have Initial (“starting”) buying or selling.  Since early November (last market peak) there has been more selling days than buying.  Next chart down is “Immediate” buying or selling.  Again the bias is toward selling.  The chart right above the price chart is accumulated buying or selling.  This is the sum of the volume on the up price bars (and minus the volume if down) during the last “swing of the market”.  These shallow histogram bars indicate to me that there is not much volume steadily flowing in any one direction (barely red or green).  Pretty much a stale mate and lack of conviction in either direction.

We also need to pay attention to the price levels, and (roughly) the 1270-ish area of the S&P 500 index is a level that the market is having trouble breaking through.  We call this level “resistance”.  With low volumes and prices bouncing off resistance . . . maybe most of the major investors have given up this year and gone on vacation until January 2, 2012.

Looking at a longer term picture, Bonds and Defensive issues (consumer staples and high dividend stocks) are showing greater Relative Strength to the over all market.  Obviously concerns about Europe continue, and I think many folks don’t see anything firm coming out of the EU until after the 1st of the year.  The next major action point is in early July when banks report on their “stress tests”.

Have a good week and (try to) enjoy the Holidays.  (don’t make it too much extra work).

I’m happy to receive comments; click on the “comment” section at the top of the post.  Let me know what you like or don’t like.  I can adapt, just like adapting to the markets.   🙂