The Volume Cannot Be Trusted

stock volume

Momentum is red. I know. I know. How can I sit on cash right now when the Dow jumps 500 points, the S&P 500 snaps off the bear market level, and even the NASDAQ is up 1%. I’ve seen this movie before. 

As I’ve noted, the S&P 500 remains in a negative channel of lower highs and lower lows. Many consumer stocks are now trading at levels that suggest a recession is imminent… 

But most of all? There’s a problem with the volume.

When Average Isn’t Good Enough

The S&P 500 has twice attempted to break above the critical 3,980 level with an eye on 4,000. Instead, it rolled back two times. And while these gains look impressive after a seven-week losing streak…

The buying pressure is weak. The moves higher have less to do with the fact that people are buying. And more to do with the fact that the aggressive selling is slowing down. That allows low-volume purchases to push stocks up quickly. 

The S&P 500 volume is at about 60% of normal. The Nasdaq 100 (QQQ) is about two-thirds of the average volume. Since January, the traditional move on these low-volume rallies is a two- to three-day move higher, followed by aggressive institutional selling. 

This buying could be short covering. It could be foolish investors trying to find a bottom. I’d argue that it’s the latter. This is a short-sellers market, and it will likely remain so for the foreseeable future.

Before diving back into this market, you’ll want to see a few things. 

  1. A three-day rally that pulls stocks out of the negative channel
  2. Higher volumes – at least in line with the 30-day average
  3. A large amount of insider buying compared to insider selling
  4. A switch in momentum across the full market (all 8,000 stocks)

Don’t Chase This Stock

Everyone wants to find the next Moderna (MRNA). The biotech stock surged from $20 in 2019 to more than $400 after the COVID-19 breakout and subsequent vaccine development. 

Americans have moved on from COVID-19 to monkeypox… because the biblical scale wasn’t high enough, I suppose? Last week, investors poured into SIGA Technologies (SIGA) after news broke that the first cases hit the United States. SIGA is a developer of vaccines for this condition.

It remains unclear the extent of this disease’s breakout capacity. But people poured into the stock on Friday, only to watch it crater from nearly $16 this morning to under $11. The news is still early, and the markets are still punishing biotech stocks. So buying a stock like this right now is quite risky. 

In this situation – if you’re interested in the company’s capabilities, you need to do more research. First, think about what it’s worth, and then explore any available put credit spreads for entry. 

This could be a bagholder stock, and you shouldn’t chase these stocks – especially in the afternoon. I expect that it will be volatile over the coming weeks. And I want nothing to do with it right now.

Software Apocalypse

Well, Wall Street finally got around to cutting price targets on every overpriced software stock. Today, Jefferies slashed price targets on more than 25 software companies. 

Almost all of them had extremely high price-to-revenue ratios not too long ago. Remember, a price-to-sales ratio of 10 means that a company must justify its share price by returning 100% of revenue to its investors (every dollar it makes) for ten straight years. Not only is that illegal… it’s irrational. 

With the Fed hiking rates, the investment bank took an ax to everyone from Splunk (SPLK) to Microsoft (MSFT).

I’ve already warned about many stocks on the list because of their high price-to-sales ratios. Those stocks include Atlassian (TEAM), Snowflake (SNOW), Datadog (DDOG), Cloudflare (NET), Asana (ASAN), CrowdStrike (CRWD), and IronNet (IRNT). 

Do not start loading up on these stocks in a negative momentum environment. Some of them have another 25% to 30% lower to go because of their existing valuations. 

It will be interesting to see if other banks follow suit. Some of these companies went public within the last two years. So any bank that had exposure to the IPO may still be reluctant to say exactly how little these stocks are worth. 

As we head toward a possible recession, companies are cutting their software subscriptions to save money the same way that American consumers are cutting their streaming subscriptions.

Everyone is pinching their pennies. Save yours. Cash is still your best friend right now.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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