What the Stock Market's 'Breakout' Is Missing: Volume

So much for the breakout. The S&P 500 ($INX) finally crossed the 1,130 level on Monday, Sept. 20, a technical milestone that was supposed to mark the next big leg up for equities. Yet, since that strong start (closing at 1,143), stocks have spent the remainder of the week languishing. That's the rub with technical indicators: They trace not just changes in price, but in volume -- and volume has been anemic for ages.

Without volume, market action shows us primarily what computer trading is doing -- not actual human beings. The majority of daily volume comes from so-called program trading, whether it's sophisticated high-frequency algorithms executing trades in milliseconds or just indexed mutual funds and exchange-traded funds seeking to track a benchmark.

Without volume, the market is said to lack conviction, that oh-so-human trait that actually creates a definitive trend.

"Machines Talking to One Another"

"There was so much jubilation when the S&P 500 pierced the 1,130 level that it obscured a whole bunch of internals saying that, sorry, no, this was not a real breakout but actually another failed test of the interim highs," David Rosenberg, chief economist and strategist at Gluskin Sheff, told clients in a note Thursday. "'Volume never ratified the 'breakout.'"

Without volume, market action just reflects the "machines talking to one another," says Jason Weisberg, managing director at Seaport Securities. As he's been telling DailyFinance since March, the market needs to sustain a rally over several trading days on strong volume before he'll have faith that stocks can break out of their range-bound rut.

With so much money on the sidelines or out of stocks entirely, that could take a good long while. Institutional and retail investors just don't have much appetite for domestic stocks, as the flow of funds data continue to show. Since May 5, there have been 20 consecutive weeks of outflows from domestic mutual equity funds, according to the Investment Company Institute. Investors have pulled nearly $70 billion out of domestic stock mutual funds so far this year. That money is going into bond mutual funds and foreign equity funds mostly -- anywhere other than the U.S. stock market.

Still Resistant

So, of course, volume is thin. A broad swath of investors doesn't like stocks at theses levels, and that's a helpful way to think of the technical concept of resistance. When the price of anything (in this case equities) gets too high, potential customers resist paying for it.

Until the fundamentals of this market improve, range-bound trading appears here to stay.

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If you don't like what Obama is doing, vote for someone other than republicans or their dysfunctional tea partiers. They will only set us into a reverse course back to near total economic collapse. You will do everyone a favor by voting for your dog.

September 24 2010 at 5:00 AM Report abuse -1 rate up rate down Reply
Samir semaan

What the market lacking is the momentum and that will not be created overnight because of lack of confidence in the finaancial market and the banks are not lending money to people who are honest and charging exuberant prices on overdraft and interest rates and are not helping small business owners so the money will be circulated economy and services based on productivity and trust and is lacking today and that why you see the economy is stagering because there is no trust in the banks and there is no lending even for those who are qualified. That will hinder productivity and the money to be circulated.

September 24 2010 at 2:26 AM Report abuse rate up rate down Reply

Their silence is deafening.......they're cooking up another way to rob us all of our last dime.

September 23 2010 at 10:33 PM Report abuse +1 rate up rate down Reply
1 reply to Susie's comment

You've got that right. It's what liberals do.

September 24 2010 at 1:42 AM Report abuse +1 rate up rate down Reply

There just isn't anything left to rape in America to keep the big boys in their plush life style. guess we'll just have to wait till the new generation comes in with their dreams of work hard and expect their dreams to come true.

September 23 2010 at 9:43 PM Report abuse +4 rate up rate down Reply

The markets are missing a World War III an soon as it comes they will profit from it.

September 23 2010 at 9:36 PM Report abuse +4 rate up rate down Reply

Anyone notice that the leveraged ETF's aren't moving correctly, or is the money flowing between stocks in the same segment?

September 23 2010 at 9:05 PM Report abuse rate up rate down Reply

A tale of tulips- Tulip bulbs worth nearly a half-million dollars! The Dutch all wanted tulips but tulips were so expensive only the rich could afford them. God forbid if a bear robbed you of your picnic basket and all you had to eat were tulip bulbs. Free markets eventually take over and now every Dutch person that wants a tulip has got a tulip. Gosh, tulips are beautiful but so are the free markets that bring them to you.

September 23 2010 at 8:50 PM Report abuse rate up rate down Reply
1 reply to monseigneurdev's comment

No volume in the stock market because buyers and short covering are moving in small amounts. They are uncertain if a correction will take place, uncertain if the economy will fall into all out depression, uncertain if taxes will go up, uncertain, uncertain and uncertain. No clarity means money flow pauses. At some point, I wish I knew when, the lack of clarity will diminish and the money will flow. And when it does, we will see inflation like we have never seen before. Good luck.

September 23 2010 at 7:34 PM Report abuse +4 rate up rate down Reply

Be your own bank, if you need money get it without penallitys, and costs. Don,t let other companys or programs hold your money, they charge you and you pay for early withdraw .. screw that crap paying for withdrws if you need it on your own money. Be your own bank and when you need it just go get it, your life will run better that way, and you will save money in the long run.

September 23 2010 at 6:27 PM Report abuse +3 rate up rate down Reply

Like the old saying goes if you touch some thing and your finger gets burn, and you keep touching it ,, your a complete dummy, too many people got burned and they won,t be just investing there hard earned cash for many yers to come. Even after the Great depression the masses of people didn,t trust banks or stock market and if you read about it it took many years to come back, many people hide there money in the last depression instead of trusting banks .. the same thing is happing now, and if your smart you should be scared to spend your savings with prices going up and up, your going to need that cash from time to time these days and it will feel good to have it when you want it.

September 23 2010 at 6:21 PM Report abuse +1 rate up rate down Reply