Stocks concluded the last day of the first half of 2009 on a negative note, as the major indices sold off on higher volume. The bulls attempted to build on the previous day's strength in the first half hour of trading, but a worse than expected consumer sentiment report at 10:00 am ET sparked a sudden reversal of fortune. One hour later, the main stock market indexes had fallen to the previous day's lows, where they found support throughout the rest of the day. A little bounce in the final ninety minutes of trading lifted stocks off their worst levels of the day, but the major indices still closed in the bottom third of their intraday ranges. The Nasdaq Composite lost 0.5%, the S&P 500 0.9%, and the Dow Jones Industrial Average 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices posted matching declines of 0.4%. For the choppy, range-bound month of June, the Nasdaq Composite gained 3.4%, the S&P 500 was unchanged, and the Dow Jones Industrial Average lost 0.6%.
Turnover swelled 22% in the NYSE, causing the S&P 500 to register its fifth "distribution day" in recent weeks. Total volume in the Nasdaq was only fractionally higher than the previous day's level. When the market sells off on higher volume, it indicates selling amongst mutual funds, hedge funds, and other institutions. An occasional bout of such distribution is normal, and can usually be absorbed by a healthy market. However, the presence of five or more days of institutional selling within a period of several weeks very frequently leads to a substantial correction in the broad market. While negative volume patterns alone may not be sufficient cause to blindly sell long positions, astute traders heed the legitimate warning signal of numerous "distribution days" by tightening stops and holding off on entering new positions until the underlying market internals improve. Volume is one the most reliable technical indicators at our disposal because it is the footprint of institutional trading activity, which represents more than half of the market's volume on any given day. Unlike moving averages, which are lagging indicators, volume is a leading indicator; hence it never lies.
In mid-June, the major indices entered into a short-term correction off their highs. In the middle of last week, stocks began rebounding from the lows of that pullback, but they gave back part of those gains from that bounce yesterday. On the daily charts of the S&P 500 and Dow Jones Industrial Average, this has led to the formation of a topping pattern known as a "head and shoulders". Presently, the "right shoulders" are being developed, so a break below the "neckline" (last week's lows) would indicate follow-through on the pattern.
