Embrace Low-Volume

End of Day Analysis:

Stocks finished with another record close. This puts last month’s emotional selloff even further behind us. While prices have rebounded decisively, many traders remain numb from the bitterly painful plunge to 1,820. If anyone is not totally dumbfounded by this market, then clearly they are not paying attention. We went from record highs in September, to a world-is-ending selloff in October, and are right back to making fresh highs in November. This was one of the most abrupt moves in recent history and it did an amazing job of humiliating nearly everyone trying to trade it.

October’s sell off triggered the highest volume we’ve seen all year, but the subsequent rebound has been much more sedate. While many prognosticators claim the low-volume rebound shows lack of conviction, they are misinterpreting this as a bearish phenomena. While the lack of conviction is real, the contrarian investor sees this as a bullish development. It shows a huge number of recent sellers missed this rebound. With every new high, the market is leaving them further and further behind. And the pressure is building for them to jump back in. These regretful sellers are the source of the low-volume buying that will propel us higher into year-end.

While the market is setting up nicely for a chase higher, we need to be mindful of support. A dip back under 2,000 or the 50dma so soon after reclaiming them shows larger problems are lurking under the surface. It is okay to own the market here, and sideways trade that dips back to 2,000 is normal and healthy, but failing to hold support would be a major concern. Trade accordingly.

Jani