Grandpa is not the only one commenting on the equity market trading volume

Grandpa is not the only one commenting on the equity market trading volume trading volume as noted in the following Marketwatch article By John Spence. Link to grandpa's trading volume post

S&P 500 ETF may be sending bearish signal

Trading volume, technicals set off jitters despite recent bounce

BOSTON (MarketWatch) -- Investors are hoping a summer rally will revive their battered stock portfolios, but the recent action in a key exchange-traded fund tracking the Standard and Poor's 500 Index suggests a troubling lack of buyer conviction and follow-through.

"From our lens, this is still a meat-grinder of a market," said David Rosenberg, chief economist and strategist at Gluskin Sheff, in a July 23 research note. He added that second-quarter earnings news has, on balance, been positive, "but not a slam dunk."

The bulls savored a victory late last week when upbeat earnings reports and European economic data sparked a surge Thursday of more than 2% in the SPDR S and P 500 ETF. The rally came one day after the market tanked as Federal Reserve Chairman Ben Bernanke warned the economic outlook was "unusually uncertain."

The gains held Friday as markets digested the release of the highly anticipated European bank stress tests. The S and P 500 has bounced solidly from the 2010 low it set on July 1, and is up around 7% so far this month. It remains to be seen whether the rebound is an inflection point or another head fake before moving lower.

Backward steps

Yet since Memorial Day, a disturbing trend for bulls has been that when trading volume picks up, it usually means selling and lower stock prices.

Between the sell-offs, the rallies have been characterized by fading volume as investors fret over European sovereign debt. Recent U.S. data on the economy and housing market have disappointed after the expiration of home-buyer tax credits, further weighing on sentiment and stoking fears of a double-dip recession

Since the beginning of June, the three highest-volume days in the SPDR S&P 500 ETF by share volume have resulted in declines. Two of those days resulted in losses of at least 3% -- on June 3 and 29. In July, the two most-active sessions also ended with stocks in the red. One was July 16, when the fund plunged nearly 3%.

The S and P 500 and ETFs that follow it have failed numerous attempts in the wake of the May 6 "flash crash" to break through their 50-day moving average, a closely watched technical indicator. Last week's rally did push the ETF above this average, and traders will be watching to see if it can hold.

In another potentially bearish signal, the 50-day moving average earlier this month dropped below the 200-day moving average. Chart followers call this event a "death cross," and the last one presaged the 2008 sell-off. Death crosses ring alarm bells with technical analysts, but their forecasting track record is mixed.

Meanwhile, falling Treasury yields and massive inflows to bond funds highlight investors' unease and desire for safety. For example, the $3.5 billion iShares Barclays 20+ Year Treasury Bond Fund has rallied more than 10% this year -- bond prices and yields move in opposite directions.

Treasury yields did rally Friday on relief the European bank stress tests didn't hold any negative surprises.

Still, the stock market appears to be pricing in a much stronger economic recovery than the fixed-income market, and analysts say both can't be right.

Cautious outlook

Standard & Poor's Global Investment Policy Committee in a July 21 outlook recommended underweighting equities and overweighting cash. "Heightened volatility, caused by plunging Treasury yields, global economic growth concerns, and sovereign debt worries, increase the range of investment outcomes, and therefore merit a more conservative investment stance," S and P said.

"The S and P 500 remains in an intermediate-term downtrend off the bull-market highs from April, with prices trapped between strong overhead on the upside and an apparent sturdy floor on the downside," the committee added. "Specifically, we see the S and P 500 trapped between the June highs up around 1,130 and the July lows down around 1,020."

Another potential red flag is how S and P 500 stocks have been moving as a herd either up or down. Earlier this month, the component stocks' correlation to the S and P 500 rose to the highest level since the October 1987 crash, The Wall Street Journal reported.

"There has been a lot of discussion over the past few weeks concerning the increased correlation between individual equities. Basically, on days when the market is up, it seems that all stocks go up, and on days when the market is down, everything is lower," Bespoke Investment Group said in a July 22 report.

One primary reason for the trend can be traced to the increased popularity of ETFs, such as the largest one tracking the S and P 500, Bespoke said. Individual stock correlation "bottomed in 1993, which was coincidentally the year that SPY began trading," it added, referring to the SPDR S and P 500 ETF's ticker symbol. "Since then, the increased correlation among stocks has increased in lockstep with moves in SPY's volume."

Bespoke concluded: "There has never been a period in the market's history where individual stocks traded in such lockstep with each other than they did in 2009. Now, even though we have since seen a decline in the relationship, current levels are now higher ... than they were in more than 98% of all other days since 1929. For better or worse, you can blame it on the SPY."