S&Ps Mini Bubble

BarroMetrics Views: S&Ps Mini Bubble

Figures 1 and 2 say it all.

Figure 1 is the S&P cash, Normalised Volume.  Notice that since Jan 3, we have seen the volume and/or range decline as the market has moved higher. On the other hand, the 30-years have declined in price (up in yields) as the S&P has moved north.

Now generally under these conditions, one could reasonably expect the S&P to move down. I have seen forecasts of 1% to 5%; but all the S&P wants to do is grind up.  What do I mean by ‘grind up’? Let me quote Sentiment Trader:

“Bulls enjoyed their third straight day of new highs with volume not only well below average, but each day lower than the previous day.  That’s usually a bearish setup going forward, but that’s in “normal” market conditions, which we most definitely are not experiencing now”.

My view is the S&P is in a mini bubble; the players  sustained in the belief that the FED will do whatever is necessary to prevent any substantial decline.  Of course, in the long run, the FED has no such power but under these conditions the S&P can continue to move up far longer than shorts can remain solvent.

As in all bubbles, we are starting to hear the cry: “This time is different.  The stock market will continue its rally”.  I have heard this many times before, most recently in Oct 2007 (just before the sub-prime induced crash).

In the meantime. commodities and interest rates are all saying that inflation can be expected and in these instruments we see the ‘normal’ rules of trading apply. That being the case, that’s where I’ll park my trading dollars, at least for now.




FIGURE 2 30-Year Bonds and S&P, Cash

9 thoughts on “S&Ps Mini Bubble”

  1. Increasing volume means increasing equal number of sellers & buyers (bear & bull).

    If the bull trend is “so obvious”, there will be decreasing number of people wanting to sell, though there is an increasing number of people wanting to buy.

    The result will be: decreased volume?!

  2. Hi Paul

    Thanks for your comments.

    I would disagree with the comment “Increasing volume means increasing equal number of sellers & buyers (bear & bull); but I could not be able to explain why here – space reasons.

    And in an uptrend, I would disagree with the second comment,

    I’ll blog my views tomorrow.

  3. This bull market continues to climb a wall of worry is the thing that has been repeating itself in my mind day after day as I see the S&P crawl to the upside. The low volume day in and day out is weak sign but we dont have confirmation yet. All we can do is go with the flow, till it changes.

    Thanks for the great articale Ray.

  4. Hi ATB

    Thanks for the comment.

    I agree, there is no confirmation of any sort of top in the time frames I trade. And…

    …yes going with the flow i.e. focusing solely on the price action is one way to go. If that’s your edge, then all the more power to your trading.

    For my part, I prefer to shift to instruments where I can ‘read’ the price action. That’s my where my edge resides.

    Every success.

  5. The below weekly chart of the 30 yr yield is interesting to contemplate.


    Do yields turn down once more at the top of the trend channel, or do they break out, signalling the end of the nearly three decade bear market in yields (bull market in Treasurys)? My guess is, with the Fed still intervening directly in the Treasury market, there will be another test of the 3.85%-4.15% area before breaking 5% to the upside later in 2011.

    Many analysts have noted that long term yields have risen since QE2 began, apparently contradicting the stated intention of lowering long term rates. However, the FOMC statement and Bernanke’s statements to the press do not say that lowering long term rates is a goal of the large scale asset purchases (Bernanke actually says he is *not* conducting quantitative easing).

    Fed purchases of 20-30 year bonds are currently 1/4 the dollar amount of the other tenors. Accordingly, a simple reallocation, overweighting the long end in future operations, could be sufficient to bring down the 30 year (this could be announced as early as tomorrow by the NY Fed). Headline risk from China or foreclosure fraud lawsuits (particularly against BAC) in the US, could also accomplish a lowering of yields.

    All in all, if the 30 year yield undercuts last week’s low, I’ll become intermediate term bearish in US equities.

  6. Ray, Thank you for an insightful article. I have a dilemma regarding volume metrics.

    I hear now most of volume in indexes is generated by intraday HFT algorithms and HFT algo’s don’t care about daily/weekly trends. If that is the case then shouldn’t that make volume metrics ineffective?

    But I see many professional traders do use volume in their analysis successfully. So I am missing something. Hence the dilemma.

    I am wondering what your views are on this.


  7. Hi EB

    I agree that rates are in the short term in a trading range between 145 to 136 (on the high side) and 112 to 109 on the low.

    On the FED action:

    1) Are they intervening? May be. I’d day probably
    2) What Bernanke says about the FED intention is a whole other matter. His comments, to me at least, are often contradictory.

    Will the FED shift its tenor? This is not as clear cut. It is certainly seeking to weaken the US$. But the FED must worry that if long-term yields drop perciptiously, how will foreign investors react? That has to be the 64 dollar question.

  8. Hi D

    Thanks for your comment

    Poor old algos, it seems they get blamed for just about everything nowadays.

    The assumption you have to consider is whether alogos generate most of the volume in the indexes.

    There are massive pension funds, growth funds etc who are large players and whose volume (at this stage anyway) dwarf that of the algos.

    The bottom line unless the shadow market takes over the exchange volume, volume analysis will be useful. And this is why so many professionals use it.

  9. Bernanke before the House Budget Committee on Wed Feb 9:

    “Conventional monetary policy easing works by lowering market expectations for the future path of short-term interest rates … By comparison, the Federal Reserve’s purchases of longer-term securities do not affect very short-term interest rates, which remain close to zero, but instead put downward pressure directly on longer-term interest rates.”

    If the 30-year bond yields rise since Aug 2010 is any indication of the success of the program to lower yields, I’d hate to see what Bernanke would term a failure of the QE policy.

    QE II was ‘advertised’ about April 2010 and in Nov 2010, implementation was announced.

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