Thursday, June 24, 2010

Of Low Volumes And Fund Outflows From Long Term Mutual Funds

I was reading the following research: 3 Signs of a Sucker Rally.

Now obviously, without clicking the link, surely such an article would interest you too. No? I for one do not want to be made a sucker. And neither does my money want to be a sucker too. :P

(yaya.. much easier to say... "I am kiasu!" )

Ok. The article is rather technical but for what it is worth I paid much attention to the following section.

  • Volume and Conviction

    Discernment of trading volume is one of the most basic components of technical analysis. High trading volume shows conviction, while low trading volume indicates lack of conviction. Trading volume is not a short-term indicator, that’s why we look at longer-term time frames.

    The chart below reflects the analysis of the NYSE trading volume over three time-frames.
    1) The October 2007 – March 2009 decline
    2) The March 2009 – April 2010 rally
    3) The post April 26, 2010 decline

    The daily NYSE trading volume from the October 2007 highs to the March 2009 lows averaged 1.48 billion shares. The daily trading volume from the March 2009 lows to the April 2010 highs average only 1.30 billion shares, a 12.63% drop. The trading volume since the April 26 peak averaged 1.59 billion shares, a 23% increase.

    What’s the essence of this analysis? Conviction associated with the March 2009 – April 2010 rally was limited compared to the declines that sandwiched the rally. According to trading volume, the March 2009 – April 2010 rally was a counter trend or sucker rally.

    If we drill a bit deeper, we see a large number of distribution days occurring since the April highs. Distribution days see the major indexes decline on large volume. Not only that, the rally that lifted the S&P (NYSEArca: SPY), Dow Jones (NYSEArca: DIA) and Nasdaq (Nasdaq: QQQQ) some 7% over the past two weeks has come on the lowest volume in nearly two months (see chart below).

    The conclusion we may draw is that not only has the larger trend turned down, the recent rally seems to be fizzling out as well.

I am sure you would have noticed the pattern too.

On 'up' days the stock goes up on thin volume and on 'down' days, the volume increases.

And logically, things should be bad when Jim Cramer starts talking about it. Jim Cramer Calls This A Bad Rally!

Like for example last night, the home sales were utterly shocking. See Yves charts: WORST HOME SALES NUMBERS EVER

But let's take the media comments. From CNBC Bob Pisani: Pisani: Why Builders Traded Up (!)

  • Still, the numbers were a shock. The May new home sales number, at 300,000, is an all-time low (they started collecting new home sales in 1963). The number was 30 percent below analyst consensus of 430,000. April new home sales, which included the benefits of the tax credit, was also revised downward by 58,000; March was also revised downward.

So there's no denying the numbers are so, so, so bad but then as mentioned by Bob Pisani the builders traded up! LOL!

Stocks going up on bad news!

Bad news makes stocks trade up now huh?

And yeah they traded on ultra thin volume! LOL!

Which reminds me of the posting I made last month: Massive Funds Cashed Out Of Equities

let me reproduce the table...

And here is the latest update:

Look at 5/26. Two weeks after 'Flash Crash', ie on the week of 5/26, Americans pulled out a massive 13.4 billion out from long term mutual funds on equity. ( source: here ) (ps: if you are counting, that's 7 consecutive weeks of outflows)


Americans don't like their own stocks anymore?



I have no idea if stocks would go up or down. :P