As the machines did their usual thing and threw money into stocks, they did so on the lightest volume day of the year. A grand total of 3.78 billion shares on the NYSE Composite hit the tape today, which does not say a lot following the much anticipated jobs report on Friday. Allegedly, this light volume was because market participants were awaiting the super-secret meeting of the FOMC, who are deciding whether or not to hike the discount rate another 25 bps.
But alas, the lack of volume does not matter. In fact, it is easier for the trend-chasing algobots to walk the market up when there is no volume, as they did into the close.
I have been looking for a near-term correction but am now wondering if we are going to get one. I am pretty sure that the market is going to go down again one day, but with an ocean of liquidity flooding into risky assets, this could go on for awhile.
How long is awhile? Over the past two months, there has been only one day when the S&P 500 has fallen more than 1%. Seems like a long time, right? Well, consider that from July 24, 2006 to February 26, 2007, there were only two days when the market was down more than 1% as stocks went unrelentingly higher.
The S&P 500 rose 8.5% in the two months after the July 2006 low, then proceeded to gain another 10% over the next six months as the market walked up in a narrow band. Ultimately, the move ended on February 27, 2007, with the S&P 500 cratering 4% intra-day on big volume, and 498 of the 500 stocks in the S&P 500 in the red, which, in my opinion, presaged the end of the cyclical bull market.
We may get a correction, or we may not, it is hard to say. The internals have been extremely strong even though volume has been light. It is also easy to get sucked into the market at the beginning of a seasonally strong month such as April. One also must be mindful that the market is approaching the end of its traditional bullish period (November through April). But indices around the world are breaking out to 52-week highs and are showing no signs of breaking down.
This will ultimately end badly, but stocks generally do not enter a bear market when there is an inflection point in jobs and the economy is coming out of the recession. Stocks also usually do not enter a bear market when the Fed is at the very beginning of its tightening cycle, though perhaps this time is different given the unprecedented amount of stimulus flooding the financial system.
But until shown otherwise, even if we do get a 5%-10% correction, the path of least resistance is higher as the economy improves and the oceans of liquidity flood the asset markets.