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The Quiet Market Rally

You could hear a pin drop on Wall Street lately. The market has been ticking up in a summer rally, but its been doing so with very little commotion.  That might not be a good thing.

The market touched a four-year high last week.  That, in itself, is a good thing.

But at the same time, market volume has been the low, the lowest since 2007, with an average 5.7 billion shares trading hands every day this month (according to CNBC). That’s not good.  If the level of trading activity is any indication of the strength of a rally, this rally is on feeble footing.

August tends to be a quiet month for the markets…but this is eerily quiet.  Low volume means investors are not participating in the rally. Apprehension shows in mutual fund flows: the week before last, investors pulled $2.7 billion out of stock mutual funds while they poured $7.2 billion into bond funds (according to the Investment Company Institute).  And that shift out of risk has been ongoing this summer: so far this quarter, $15.9 billion has been drawn out of stock funds, and $12.2 billion has been put into bond funds.  The market may be rising, but confidence is not.

Investors might not be participating in this rally, but there is one company that definitely is: Apple.  Last week, the tech firm became the most valuable company of all-time when its market cap rose to $623.5 billion.  And as its market cap has risen, so has its influence over the S&P 500…meaning Apple’s rise has played a role in the market’s gains.

We should question the legitimacy of a low-volume, no participation rally that is helped (at least in part) by one large-cap stock.  Sound market rallies are not made up of investors hiding on the sidelines and stuffing money into safe bets.  A rally like that lacks conviction.  A rally like that is built on shifting ground.   A rally like that makes me question whether the market could be topping out and heading for a correction.


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