By Nicholas Santiago on February 1st, 2010 3:35pm Eastern Time
The major indexes are all catching a bid trading sharply higher on the day. This is the type of action that we have seen from the March 2009 lows. The Dow Jones Industrial Average (NYSE:DIA, DJI), SPX 500 (NYSE:SPY), NASDAQ (Nasdaq:QQQQ), and the Russell 2000 (NYSE:IWM) seem to climb when two major factors are present.
The first factor that we recognize is the light volume. For most of 2009 a case can be made by simply looking at any chart of the SPDR Trust (NYSE:SPY) that the market rallied higher on light volume, and sold off on very heavy volume. Healthy markets historically increase on high volume and decrease or pullback on light volume. This has not been the case throughout the 2009 rally as the opposite occurred. Today is much like the rally days of last year as the market is trading higher on much lighter volume than we have seen recently over the past few weeks.
The secondary factor that usually takes place in order to see a rally from my observation is a weak U.S. Dollar. Throughout the 2009 rally the U.S. Dollar declined into early December. From the March 2009 high to the December 2009 low the dollar declined over 17 percent. Today we see the market trading higher as the U.S. dollar is weak and trading lower on the day.
When the dollar is weak and the volume is light we usually have a positive trading day in the market. Therefore, when the volume is heavy and the dollar is strong the market generally declines. This looks to be due to an inflation effect that takes place. Every commodity gets inflated when the worlds reserve currency (U.S. Dollar) moves lower. Commodities and inflationary stocks all trade higher on the weak dollar. Anything inflationary such as oil, gold, copper, silver, iron, and agriculture all benefit from the declining dollar. So it is safe to say when volume is light and the dollar is weak it is prudent to use caution on the short side as the market will usually rally.
Nicholas Santiago
Chief Market Strategist
www.InTheMoneyStocks.com
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