On any given day, there is no shortage of reasons provided for why the market did what it did. But how can we really tell what matters to the market? Simple, volume. Volume is your eyes and ears into the marketplace and is the most reliable indicator of predicting future price moves. The logic is in understanding psychology.
If the market goes up on heavy volume than you can figure that there is broad participation and those buying are doing so because they think the market is going higher. So when the market dips on low volume, those who bought in are likely to add to their positions. However, should the market dip on high volume after a move up on high volume, then those people who bought in have to question whether or not they should buy at the current level, or maybe abandon their initial positions all together. After all, low volume means alot of people aren’t doing it and the market is a game of follow the follower (assuming someone out there is actually following the leader) so volume, and only volume, can change the general sentiment of would-be buyers and sellers.
So back to the original point about trying to decipher what matters most to the market, be it yields on EU nations, D.C. politics, U.S. economic data, corporate earnings, etc… volume will always provide the answer. Watch volume closely when economic data is released to see if there is a huge volume spike relative to other data points because that would signal the market truly cares about that data. Or, watch volume as yields on EU nations debt approach certain levels (like below 6.5% or above 6.75% on Italy 10 year debt) to gauge if that is what the market is focused on. What yesterday’s low volume tells us is that whatever the market is focused on, it wasn’t around Monday.
But with another day of bond trading in Europe, a D.C. Friday deadline looming, and a flurry of economic data due out we should get some more answers, I mean volume. Inflation data hits the Street on Tuesday, with the release of the producer price index (PPI) and core PPI. Also due out are reports on retail sales and business inventories, along with the Empire State manufacturing index.
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