My study last week of SPY volume garnered more comments than usual (see Market Volume: Summer Doldrums, or Something Else?). Perhaps this is because volume has been one of the least reliable gauges of market movement since the 2008-2009 meltdown. In fact, it's become something of a contrarian indicator. Perhaps you recall from the venerable Dow Theory that volume should confirm price. Since the market bottom in 2009, upwards price trends have generally been on deteriorating volume with the downtrends on increasing volume. You may have even heard your favorite market commentator saying, "This time it's different!" It generally isn't, but that doesn't make as good of a sound bite. Just this past week I watched a market commentator saying (and I'm paraphrasing), "We're advising people to forget everything they ever learned about the market and just get in there and buy!" Left unsaid was, "This time it's different.

Just in case this time it really isn't different, I wanted to offer a few comments about important market tops in general. We often speak of 'The Market' as if it were some homogenous animal; in reality, it's more of a zoo with a collection of various animals. You may be a blue chip investor who likes the Dow Industrials or a tech type with a preference for the NASDAQ 100, but these are very different indices and, like our zoo animals, can behave differently from one another.

As a follow up to last week's SPY volume study (2007 through the present) let's step back in time and look at the important market top in 2000. We would all agree that 'The Market' peaked in 2000, right? Well, not quite so fast. Important tops tend to be more of a process than an event. The Dow Transports actually peaked in May of 1999, nearly a year ahead of the S&P 500. The Dow Industrials peaked in January of 2000; most of the rest of the important indices peaked at the end of March (NASDAQ 100, Wilshire 5000, S&P 500, NYSE Composite, etc.). The NASDAQ Composite and the small cap, Russell 2000, peaked earlier in March. The point is this: Even though we can agree that 2000 was an important top, the various indices didn't top at the same time. It was a process, not an event. If you're a market technician, you are better served by watching the whole zoo and not just the pachyderms.

If 2000 was the end of the tech (or dot.com) bubble, what better index could we look at than the NASDAQ 100? The chart below is QQQ, the Exchange Traded Fund for the NASDAQ 100. The shaded area is price (plotted on the right vertical axis) and the line graph is volume (plotted on the left vertical axis). QQQ had its maximum closing high on March 27 — and at that price, so few wanted to buy that it was the lowest volume day during the first half of 2000. Just six days later, volume had swelled to more than 5 times that. Before the year was out, it became apparent that we were seeing something more than just a market pullback, and volume swelled to more than 8 times what it was on March 27.

I penciled in a red dotted line at that date as well as a few prior dates when volume backed off noticeably when at, or very close to, a prior high. The top in 2000 was a process, but if you needed to pick a specific date, you could do worse than to say that March 27 was the day they stuck a pin in the tech bubble.

Having looked at market volumes around the 2000 and the 2007 tops, you might be safe inconcluding that it wasn't different then. But do keep in mind that tops (if indeed we are seeing indications of one now) can be a somewhat drawn out process, and the various indices are likely to peak at different times. The contrary nature of volume during that last several years may be saying that it isn't really different this time either. Volume is merely confirming what we may have suspected: This has been a pretty long rally, but within the context of a secular bear market.

---

Note: For a historical perspective on the significance of the QQQ 2000 topping process, here is a five-year snapshot of QQQ price with the six-month period discussed above highlighted.

(c) Bill Hardison