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Low Market Volume Is A Concern - It Won’t Come Back Without This

Posted by Pete Stolcers on October 29

Posted 9:30 AM ET – Yesterday the market gapped higher and it sat the rest of the day at the all-time high. Prices compressed and the trading volume was extremely light. We are in a holding pattern until the FOMC statement tomorrow. Take profits on long positions ahead of the news.

September and October are typically busy trading months and the incredibly low trading volume is unusual. Historically low interest rates and the likelihood of future easing are keeping a safety net under the market. Stocks are trading at the upper end of their valuation range and global economic conditions are slipping. Resistance at this level has been stiff and Asset Managers are not worried that they will miss the next big rally. Consequently, we are trapped in a range and the volume is drying up.

Uncertainty has been removed in the last few weeks. A trade truce with China seems likely and Brexit has been postponed until January 31st.

This is a busy week for economic releases. Activity is likely to soften, but the Fed will counter that with a rate cut tomorrow.

Earnings season has been better than feared. Results have been good, but stock valuations are relatively high so the reactions have been muted. Google posted results yesterday and the stock is down 2%. Apple will be the last of the mega cap tech stocks to report tomorrow after the close.

Swing traders should try to buy bullish put spreads back for pennies ahead of the FOMC statement. Take profits and reduce risk. If the spread still has lots of premium and the stock is well above technical support, leave it on. Make sure that the stock is strong relative to the market. If that technical support is breached you will need to exit the trade. Time decay has been working in your favor so you should be able to close it down at a profit if the FOMC reaction is bearish. I want to sell new put spreads on any market dip and we might get one tomorrow or Thursday. The Fed will cut rates but the rhetoric won’t be dovish enough for a market that is addicted to money printing. Sellers are typically passive until mega cap tech stocks have reported earnings. After Apple’s release we could see a little market weakness. I’m not expecting a big drop but I believe we are setting up for a “sell the news” event on both fronts (earnings and the Fed). I want to be ready to focus on new trades instead of managing old positions. It’s possible that the market will break out on the news. Many traders might be waiting for a pullback that never comes. I see this scenario as being less likely, but I would sell out of the money bullish put spreads on a new high as well. I would be less aggressive if this plays out and we will use SPY $302 as our new stop on a closing basis. I will provide instructions Thursday.

Day traders should try not to trade. Expect very dull trading and an extremely tight range. We are dead till the Fed. If you do trade, trim your size and activity and set passive targets. Look for stocks with heavy volume and focus on post earnings plays.

Extremely light trading volume is a concern during one of the busiest times of the year. I don’t believe it will return unless we test the 200-day moving average. A breakout to a new all-time high won’t spark panic buying with stocks trading at a forward P/E of 17.

Reduce risk ahead of the FOMC statement and hope for a dip.
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