(By Rich Bieglmeier) Must be the East Coast power outage and the Fourth of July kept most on Wall Street home on Monday, volume was nonexistent for the S&P and Dow. A few people have written to ask us why volume is so important in our analysis.
The best metaphor we can come up with to help illustrate the importance is like a commitment in a relationship. High volume is like a wedding ring, and light volume is a friendship bracelet. When traders pile into a stock or run the market up on big time volume, then investors can be more confident in the trend.
Think about it this way, if money managers buy 1,000,000 shares and lose a dollar, that's more than losing $5 on 100,000 shares. In this case, 1 million is the wedding ring and 100k the friendship bracelet – breaking up is a harder thing to do and costs more.
Hopefully, that helps clear up the picture.
iStock is not even sure Monday qualifies as a plastic, Cracker Jack prize ring. According to BBG data, Monday was the S&P's worst volume day in a decade. What does that tell you about the commitment Wall Street made?
We believe the biggest news of the day was the ISM Manufacturing report scoring 49.7. Economists were expecting a reading of 52. The significance of a sub-50 result is typically a sign that the economy is contracting. Yes, you read that right, contracting.
Following the manufacturing disappointment, rumors of QE3 started to swirl. Now, the Federal Reserve has proof that the economy is skidding to a halt, giving Ben Bernanke the necessary backdrop to liquefy without too many cries of playing politics. Never mind, any help would be seen as a boost to Obama and the other team is sure to vilify the Chairman, cue Ron Paul.
Nonetheless, the NASDAQ joined the S&P and Dow with its 12-day average bullishly crossing the 26-day, and both trend lines, for all three indexes, are on the verge of bypassing the respective 50-day averages.
If Monday's volume is light, then Tuesday's may not even register. However, the day before holidays has a strong history of rewarding investors. Maybe traders pop stocks to take profits to pay for the big BBQs at the Hamptons?
As we write, the Asian markets are firmly green. Hopefully the positive winds will blow west and carry stock higher to give Americans more to celebrate on Independence Day.
We certainly hope that you enjoy the holiday and may God bless the USA – see you on Thursday.