Tuesday's Rally Wasn't So Strong

Tuesday's Rally Wasn't As Strong As It Looked:
Markets Were Up, But Not '9-To-1 Up'

By Mark Hulbert, Marketwatch | 6 August 2008

ANNANDALE, Va. (MarketWatch)— Tuesday may have been a very strong day for the overall market averages. But, despite some chatter to the contrary in the blogosphere, it was not a "9-to-1 up day." I'm referring to the proportion of trading volume on the New York Stock Exchange that was in shares that rose in price. A "9-to-1 up day" occurs when at least 90% of the volume of shares that rose or fell in price was in shares that went up. (The term was coined by Martin Zweig, who used to publish several investment newsletters that were tracked by the Hulbert Financial Digest.)

But on Tuesday, even though the Dow Jones Industrial Average ($INDU) rose by nearly 332 points, up volume on the NYSE was just 81.6% of the combined total of shares that rose or fell. The failure of this metric to reach 90% is worrisome to several technically-oriented newsletters, whose editors consider a "9-to-1 up day" to be one of the signs that a major upmove has begun. As Zweig put it in his 1986 book, "Winning on Wall Street": "Every bull market in history, and many good intermediate advances, [has] been launched with a buying stampede that included one or more 9-to-1 up days."

So far, at least, the rally that began in mid July has seen no such "buying stampede," despite several trading sessions that gave the stock market every opportunity to do so. Besides Tuesday, there have been three other sessions since July 15 in which the Dow rose by more than 200 points, and none of them was a "9-to-1 up day." Those three previous sessions were July 16, 17 and 29. The proportion of combined up and down NYSE volume that was represented by rising shares never got higher than 82% in any of those three sessions. In one of them, July 17, the proportion was just 71%.

So the three-week old rally has yet to jump over this particular technical hurdle. How much is that a cause for concern? I argued in my New York Times column on Sunday that the lack of a "9-to-1 up day" wouldn't be such a big deal if equities were incredibly cheap right now on a valuation basis. But they're not. The price/earnings ratio on the S&P 500 index ($SPX) , for example, is currently higher than in about two-thirds of the years since 1965. See column This certainly would appear to add valuation worries to the technical concerns about whether the stock market's July 15 bottom is the final low of the bear market that began last fall. And if a new bull market isn't supported by valuations, what will be its driving force? How far can it go when its initial jump out of the starting gate is so lackluster?

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Normxxx    
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