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More Selling Than Buying Volume Puts Stock Market Rally At Risk – Mike Swanson (08/02/2021)

Last week we saw some positive developments for the price of gold as it rallied back up to its $1825 resistance level and looks ready to smash through it to begin a new rally, much like it did in April. It’s a different story, though, for the overall US stock market, as we are actually now seeing more selling volume than buying volume inside of it.

This a chart of the S&P advance-decline volume line. As Marketinout.com explains, it “is calculated by taking the difference between the volume of advancing and declining issues and adding the result to the previous value. It rises when advancing volume exceeds declining volume and falls when declining volume exceeds advancing volume. It’s important to compare Advance/Decline Volume Line plotted for the index with the performance of the actual index. The AD Volume Line should confirm an advance or a decline with similar movements.”

When it doesn’t go up when the market does that is a huge warning sign.

And that is exactly what has happened as this indicator peaked in early June, two months ago, and has been in a downtrend since, while the S&P 500 made a new high two trading sessions ago.

Last week we saw another red flag as the key big cap stocks that led the market over the past two weeks all reported earnings and sold their news. This stocks include FB, AMZN, GOOG, AAPL, and MSFT.

And this happened as the market internal indicators all have deteriorated in recent weeks, a classic sign of a rally nearing an end.

This doesn’t mean the stock market is going to crash. It does mean that in the short-term the upside potential for the market is extremely limited and the risks are to the downside. The market could simply drift for weeks now or go into a correction. Although, many fad stocks peaked in February, as typified by the ARKK ETF, the S&P 500 hasn’t had a real correction since last year around Labor Day.

Just about every single year, even during bull markets, the S&P 500 will hit its 200-day moving average. In 2018 it dumped 20% in a correction. A drop from last week’s peak to the 200-day moving average would only take a decline of just over 11%.

BTW – very few people who are currently trading the market know this happening with the internal market indicators. The frame of reference for millions of people is now what they see from their Robinhood app, which shows them no meaningful charts, and instead just lists of what others own, and daily price gyrations, which when combined together causes them to trader in a herd. They are like a pilot flying in the dark without any instruments. A simple 11% would smash many Robinhood trades as the top 100 most owned list is populated by junk stocks that would get hard on just a simple market correction. This could be one reason why the Robinhood IPO last week was a dud, failing to go up after it hit the exchange.

We also are seeing a clear move into bonds as perceived safety. This safety trend is likely to move into gold. I talk about this in this video.

-Mike

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