Why Internals and Volume Matter

Sometimes I get the feeling (just my own personal feeling) that the market internals I track, specifically the Dominant Price/Volume Relationship which is a measure of the price and volume moves of the component stocks in each of the major averages, as well as sector performance, are probably one of the more boring aspects of the Daily Wrap, however if you take a look at their track record, except in extreme oversold or overbought cases, these indications have had an excellent track record, which is helpful with short term trade or tactical planning.

From last night's Daily Wrap, this is what was seen in the internals, consistent with the intraday updates including the NYSE TICK analysis and consistent with the overnight action in futures.
From last night...



"As for internals today they may be the most significant short term signal we have.

 The Dominant Price/Volume Relationship was DOMINANT is all but the Russell 2000, which is not surprising as it has been off on its own, doing its own thing, otherwise the Dow saw 22 stocks in the relationship, the NDX100 saw 60 and the SPX 500 saw 239; the Dominant Price/Volume Relationship was Close Down/Volume Up. This is the most bullish of the 4 possible relationships in terms of an oversold condition and a next day move that usually end up green, of course we have the F_O_M_C tomorrow, but perhaps this was part of that, it was hard to glean information one way or the other that supported that kind of hypothesis.

As for the 9 S&P sectors, ONLY ONE closed green, the Defensive Utilities and only up +0.14% at that! The other 8 sectors closed red, another strong 1-day oversold condition that usually results in a close higher the next day.

Finally, of the 238 Morningstar groups and sub-industry groups, only 39 of 238 closed green, again, another short term oversold condition.

Of the 3 intraday breadth measures we use, all 3 are significantly oversold except the Russell 2000, 9 times out of 10, I'd say this results in a next day close higher in the green."

Unfortunately, a lot of this information can't definitively be put together until the close, but that's why I look at the TICK data and created the custom TICK/SPX indicator which gives us a good feel for where internals are trending, beyond the typical internals update you can get anywhere, we can see the trend.

Finally as we have talked about numerous times before in recent history, the lost art of volume analysis is going to become ever more important as we move forward and away from accommodative policy, or put another way, as the markets return to a more normal structure in which something like this would never stand....

Volume during the previous bull market is what you should expect to see. Volume since 2009 is not what you should see, but it didn't mater as the F_E_D had back-stopped the market, but that's changing, volume will become one of the two most important indications we have, those being price and volume.