Volume is Only Skin Deep

Yesterday’s action was quite encouraging for the bulls with the major indices posting gains on higher volume than the previous session. That’s called accumulation and is generally bullish.

Are we therefore backtracking from our previous column where we suggested a significant correction has begun? In a word, no.

If beauty is only skin deep so too can be volume. It is often misleading to judge a trend based on a narrow slice of activity, in this case higher prices in one day on higher volume. Dig deeper and you’ll find a less bullish tale.

Stocks that had been leading the market found little favor yesterday. GMCR continued to fall apart, unable to find even a modicum of support. It has now tried twice to turn higher and failed both times. NTES is finding decreasing interest in pushing higher off its 50 MA. BIDU has shown more fortitude, pushing into its gap on some volume. But it needs to close that gap and climb into its previous range. History tells us that is unlikely. And AAPL, which had gapped down on higher volume, has tried to climb back on decreasing trade.

There are stocks that appear to be holding up. PWRD and STEC have been resilient. But all this activity tells us is that leadership is narrowing. Worse, nothing is emerging to take its place. Without leadership a market cannot substantially advance. And given the magnitude of the advance we have experienced off the March lows that means a significant correction is likely.

The Chinese market bounced nicely overnight, but that doesn’t begin to mitigate the impact of the correction there. As the Chinese market has led the global rally it will either take a salvaging of the “China leads the world into recovery” paradigm for the markets to recover or they will have to decouple from this theory and rise on their own merits. Here in the States, with employment numbers printing fresh lows this morning, that seems wishful thinking at this juncture.