Primitive man made binary decisions. Hungry? Eat. Fearful? Run. Tired? Rest. Modern traders exhibit the same binary decision making. Buy or sell. Fear or greed. Win or lose.
A look at the charts over the past couple years exhibits the same binary decision making. Up or down.
The classic technical analysis read of such action is that of either consolidation or distribution. The former is a good things for those with long inventory. The latter bad. But which is it?
Usually, one looks to volume characteristics to try and tell, and though many complain that volume is so light now, a look at the volume across the past 17 years shows that this simply isn’t true. Volume now is just as heavy as it was in the entire 2000-2007 period. It’s only if you compare to the 2007-09 crash that volume looks tepid.
What does appear to be true though is that volume did taper off on the last part of the massive advance from late 2013 through the middle of 2015. Lighter volume in the late stages of an advance usually is a sign of distribution — not consolidation.
Some say that volume’s disappearance from 2013 through 2015 means that there is all this money on the sideline just waiting to rush back in. Folks, if that were true we would have seen it by now. That money has already found a new place to play.
Others say that the lack of volume is because the dark pools have siphoned off a huge percentage of the trades. That seems doubtful as well. The simplest explanation is that the market has more risk than it has reward at this juncture, so why take that kind of risk at this late date?
The one theory that we don’t hear a lot about is that volume has diminished because more and more people believe the game is rigged. They believe that Wall Street is rigged just as they believe that life’s rules are rigged. We see that clearly in the primary presidential voting this year where the most prominent feature is anger from both the left and the right.
Although we don’t have outright failures just yet in the indexes, we do have a clearly identified 300-point distribution range.
We also have a growing list of sectors that have transitioned their long-term trends from bullish to sideways. With an increasing number of sectors, there is an increasing probability that this market is not going to move substantially higher any time soon. The list includes transports, financials, broker dealers, automakers, regional banks, pharmaceuticals and several others. This is not a passing phase. Trend transitions on the monthly charts — especially when they include a broad number of sectors, is not a bullish situation. If anything, it calls for a long period of technical repair. In the worst case, it argues for worsening price pressures to come.
As I have commented frequently for a long time now, the world is a mess. It’s upside down — literally. The best examples of that is zero-interest-rate and negative-interest-rate policies (ZIRP and NIRP) that have flourished for almost a decade now. It’s evident in subpar growth and productivity rates along with debt binges that have no answer, and it’s likely to continue to lead to subpar returns in the stock markets for years to come.
If you think otherwise, you are likely to make a binary decision that goes against your best interest. The next few years is likely going to be all about selling what looks like strength and buying what looks like weakness until this 300-point range on the SP 500 breaks definitively up or down and, when that happens, you simply ride that trend where ever it leads.