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tdp2664 InvestorPlace If there's one thing the market has taught us during the past four months, it's this — never underestimate its ability to do something unexpected, even logic-defying. Tuesday's 3% rally qualifies as such an event. Over the course of a pretty miserable seven-day stretch before Tuesday, the broader market had lost 4.7% of its value. In one day, it gained two-thirds of that loss back. Amazing. The reason for the bounce-back still is up for debate. A new hope for Europe's financial plight got the lion's share of the credit, though encouraging construction numbers were in that race as well. Either way, for me, the reason for the rally isn't nearly as important as the quality of it. Does it have any longevity? To fully gauge that, we have to dig much deeper into the bullish move itself. A look at the gain's overall volume is a good start, but not the complete story. Here's a closer look at the move, and what the true undertow looks like: Volume Was Just OK Click to Enlarge Contrary to popular belief and headlines like "Market Surges on High Volume,” Tuesday's volume wasn't that great. It was better than Monday's, but nothing significantly better than the average volume we've seen during the past several weeks. The NYSE's listed stocks (all its exchanges) saw 3.77 billion shares trade hands yesterday — only about 15% better than Monday's total, and about the average number since August's implosion. The other exchanges and indices told the same basic volume story on Tuesday. A red flag of a faltering rally? Usually yes, but in this case, not necessarily. While growing volume is a prerequisite for any rally, there's such a thing as too much volume. When trading volume spirals out of control and the floodgates are opened within one trading session, a huge volume spike often signals a turning point as well (sometimes for the better, and sometimes for the worse). In this case, the mediocre volume actually implies there's some meat left on the bone, so to speak. In that light, the modest-volume day isn't a liability considering the accompanying price surge, It might even be a good thing, letting us know the new uptrend can indeed last since buyers didn't empty the tank all in one shot. But, there's still far more to the story. Breadth & Depth are the 'Quality' Clues While the market's raw volume data can be deceiving, if you drill down into the market's breadth and depth, there's no place for the true undertow to hide. Breadth is just a fancy word for participation; how many stocks are actually part of the rally, versus how many are actually pointed lower (and just masked by the marketwide gains). The better the participation — as evidenced by the “advancers” — the more bullish the rally. Depth is an equally fancy word for volume. Just because a market's going higher doesn't mean it's a noteworthy rally. It might just mean there are very few sellers getting in the way at that time, and the relatively big number of buyers is making a market look a little more bullish than it actually is. Breadth and depth are measured at the exchange level, and not the marketwide level. But the NYSE's breadth and depth is a very good proxy for the overall market's health. So, we'll focus on that data set with our chart. As it turns out, Tuesday's gain is even less impressive than the modest volume would suggest. Click to Enlarge The NYSE boasted 2,763 (out of 3,197) of its listed stocks as winners yesterday. Only 371 of them lost ground. That's solid, but not dramatic. Indeed, we saw advancers reach that 2,700-ish level several times since August, and clearly none of those instances meant anything terribly bullish. As for breadth, or volume, no two data sources have the exact same number, but they all have the NYSE's “up” volume from Tuesday at just above 900 million shares. The “down” volume total was a mere 21 million shares, which is remarkably low, but the advancers' volume still is quite tepid — even lower than what we saw behind Friday's modest gain. Take a look. (For all four breadth and depth plots, the histograms show the daily data, while the overlaid moving averages are indicative of any trends.) Conclusion To be fair, the trends — as indicated by the moving averages — are turning slightly toward bullishness and slightly away from bearishness. And Tuesday certainly helped on that front. Tuesday wasn't a game-changer, though. Volume was modest, and bullish breadth and depth were moderate, at best. So no, Tuesday isn't a clarion call for the bulls. The only thing Tuesday's action is telling is us that some traders already are on Christmas vacation, and there just weren't many sellers to stand in the way. Don't get too excited just yet.
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