Where’s The Volume to Confirm The Stock Market Rally?

By: Richard_Shaw

The volume of share trading for key index funds is going down while the price is going up.  Should we say the smart money is quietly accumulating shares, or should we say that the smart money is on the sidelines while the dumb money pushes prices higher?

TrimTabs reported that mutual fund cash positions are very low at about 3.6% after an unusual reduction in cash positions in the past month.  When mutual fund managers unload cash, markets generally go up.

A downside to the data is that if managers re-risk simultaneously, they eventually reach minimum cash levels necessary for normal operations — as a group, they can’t run on zero cash due to the need to maintain some liquidity for daily redemptions.

When the minimum cash level is reached, funds cease to be an engine to support rising prices, unless they receive net inflows to the funds from their investors.  Are mutual funds out of bullets?

If not fund managers, are the pensions, endowments and individuals currently ready and able to continue supplying demand?

While some markets or segments (particularly mid-cap and small-cap US stocks) have clearly gone above recent prior peaks in a bullish pattern, the lack of confirmation from volume creates some doubt.

Most of these charts show the diverging pattern of price and volume for several key index funds (SPY, MDY, IWM, VGK, EWJ, EWA, EWC, VWO, FXI, EWZ):

Holdings Disclosure:
As of March 9, 2010, we hold SPY, MDY, and IWM is some, but not all managed accounts,  We do not have current positions in any other securities discussed in this document in any managed account.

By Richard Shaw 
http://www.qvmgroup.com

Richard Shaw leads the QVM team as President of QVM Group. Richard has extensive investment industry experience including serving on the board of directors of two large investment management companies, including Aberdeen Asset Management (listed London Stock Exchange) and as a charter investor and director of Lending Tree ( download short professional profile ). He provides portfolio design and management services to individual and corporate clients. He also edits the QVM investment blog. His writings are generally republished by SeekingAlpha and Reuters and are linked to sites such as Kiplinger and Yahoo Finance and other sites. He is a 1970 graduate of Dartmouth College.

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