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Low Volume Pullback = Healthy Market

We've had a great month so far for the market. Yes, today was a downer, but the good news is that it was on low volume. A low volume pullback just means that the traders got scared and don't yet believe we are fully in rally mode. That is a good thing for those of us that feel we are in a multi-week rally that will take us to the 200-day moving average.

So what is good? I like visuals, so if you look at the chart above:

1. You will see that since this blog called the intermediate low in early March, the red volume bars on the selloff days are smaller than the green volume bars on the rally days. That means that more people are buying than selling – a significant change in psychology that is self fulfilling, just like it was during the crash. The more people that are buying, the more people on the sidelines are drawn into being buyers.

2. We pulled back to the 50-day moving average. If we hold it (and the future right now after market are positive) this can put in a new layer of support that will allow us to move higher as buyers reappear.

3. The bears are everywhere on TV today saying that the rally is over and we are headed back to the lows. People who switch their views from wildly positive to wildly negative in two trading sessions are not to be believed. They have no thesis for their views. Our thesis has been explained in detail in the post in early March where we called for the intermediate term low and nothing has changed to alter the thesis.

Days like today are gifts to those that missed the early chance to buy into the rally. We, however, used our call in early March to get clients fully invested. We have been repositioning portfolios to take advantage of the transformation in the market. The sectors that have been strong are the traditional sectors that perform well during the healing phase transitioning to new bull phase of the market.

Its an exciting time in the market – don't be scared, embrace it!