When Markets Decline On Light Volume Watch Out!

In March 2009, the S&P 500, and the Dow Jones Industrial Average found a low and staged a sharp recovery rally into April 2010

. Throughout that time that the market rallied higher the volume was extremely light. However, when the stock market indexes had corrections in June 2009, and January 2010, the volume on the decline was very strong telling us that this was institutional selling and not the traditional retail investor selling stocks. When the major stock market averages topped out in April 2010 the market declined on heavy volume again telling us that this was again institutional selling.

Yesterday's stock market decline was very interesting for one important reason and that is because the stock market actually declined on very light volume. Since March 2009, the stock market has normally rallied higher when the major stock market indexes traded such light volume. Yesterday the SPDR S&P 500 Index ETF (NYSE:SPY) traded just 166 million shares. This is very light volume and a change in character for from what we normally see in the market. Generally, we follow the old market adage which states, "never short a dull market". Yesterday was extremely dull and the Dow Jones Industrial Average declined by over 140.00 points to close under the psychological 10,000 level on the highly followed index.

What is this light volume decline telling us? It is telling us that selling pressure remains in this market at this time. This is a major negative in my opinion for the stock markets. However, the one positive that a trader or investor could find for the stock market at this time is that the commodity stocks are holding firm at this time. Should the leading commodity stocks such as Freeport McMoRan Copper & Gold Inc (NYSE:FCX), Cliffs Natural Resources Inc (NYSE:CLF), and United States Steel Corp (NYSE:X) start to break down then watch out. That would be a clear indication that the Chinese consumption boom is over and a deflationary tailspin has begun.

The entire plan by the U.S. Treasury, and the Federal Reserve Bank is to try and inflate the major stock markets back to health. Whether or not this can be done remains to be seen. History suggests that governments and central banks that have tried to inflate their markets back to health have failed. Japan has been trying to do this over the past 10 years with little to no success at all. We are certainly living in interesting times.

Nicholas Santiago

Chief Market Strategist

www.InTheMoneyStocks.com

When Markets Decline On Light Volume Watch Out!

By: Nicholas Santiago

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