Stocks and exchange traded funds (ETFs) have rallied and continued to rally. But right about now is when investors begin to lose their carefree confidence, worrying about a possible pullback in the market.
Low trading volume and high interest in small groups of stocks by short-term investors who use high-frequency trading strategies has generated a market with high valuations that don’t correspond with the performance or prospects of underlying companies. This could result in short-lived rallies, writes David Weidner for The Wall Street Journal.
The Dow Jones Industrial Average and the S&P 500, both up more than 40% from March lows, have been running with the momentum generated from the banking bailout. The problem with the last few weeks’ gains is that there is a lack of corporate profits and decisive data to support the moves, Weidner writes.
Over the past week, trading volume was most active in the financial sector as banks were required to make secondary offerings to leave government programs earlier this summer.
However, the market’s light volume in the overall market is not unexpected as August, traditionally, is a calmer month and big institutional traders are on hiatus. Yet, the lack of trading doesn’t reflect the high trading volume in financial stocks.
Michael Norman, founder of Pitbull Economics, says that rising markets with light volume doesn’t make it bearish, but suggests low urgency and in actuality, could be bullish. Regardless, investors should be aware and have an exit strategy in place if a pullback materializes.
For more information on trend following, visit our trend following category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.