The markets have been wearing on people’s patience lately. I see it on Twitter. I hear it in news stories and conversations and see it in the charts. It can be exhausting to watch a great uptrend that rewarded dip buying turn into a relentless sell-off. From its intraday peak on May 1 to its low on May 18, the S&P 500 ($SPY) dropped 8.5%. It currently is attempting to stabilize from those losses, but the evidence of a turn has not revealed itself yet. The current environment has been plagued by uncertainties ranging from global economic, concerns over earnings, mismanagement of risk procedures at JP Morgan, a disastrous FaceBook IPO, etc. There are always reasons to worry in the market, and stocks often advance when economic conditions appear to be bleak.
I am sure you have heard the phrase "markets climb a wall of worry." Phrases like that certainly ring true, but stocks also can go down in the same conditions. It can be confusing, but the ultimate filter of any news, rumor, opinion, etc. is price action.
VOLUME You know I am fond of saying "Only price pays" and for good reason. Look at the S&P 500 chart below. First notice the volume trend, the large rally of the first quarter occurred on diminished volume, many participants were unwilling to believe it could last, because the low volume represented low confidence. While the market is making higher highs and higher lows, we have to give the benefit of doubt to the buyers and always play a strong defense. If the market (or a stock) breaks below a key level of support you have to take immediate action to preserve capital, this is not a time to lollygag!
VOLUME WEIGHTED AVERAGE PRICE More important than volume alone is the volume weighted average price (VWAP). VWAP is calculated by adding up the dollars traded for every transaction (price multiplied by number of shares traded) and then dividing by the total shares traded for the day, according to Investopedia. It represents the average price paid over a certain period of time. On the SPY chart below the purple horizontal line represents the VWAP from Jan. 1 through May 24. Although the SPY is showing a YTD gain of 5.60% in absolute terms, the volume weighted average price which the SPY traded hands is ~135.55 which would mean the average participant since the beginning of the year (think dollar cost averaging) is actually down close to 2.2%. Looking at it another way, the average short seller is up by that amount. So who is really in control, buyers or sellers? We can take it another step back and look to the climatic October 2011 low and measure the VWAP from that point to the close on Thursday. The blue horizontal line represents the VWAP from the October low. It is ~129.32, which means the average participant from that date is barely maintaining positive performance.
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