Giving the S&P500 “The Look”

Lance Armstrong gave arch-rival Jan Ullrich what’s now dubbed “the look” in the 2001 Tour de France.

As Lance pulled a few bike-lengths ahead of Jan on L’Alpe-d’Huez, he stood up on his pedals, craned his head around 180-degrees and starred straight into the face of his competitor.

Some speculated Lance was taunting Jan. But I think he was sizing him up.

Poker players know to look for signs of emotion in the subtle facial cues of their opponents. Endurance athletes work much the same, showing pain, fear, dejection and fatigue in their grimaces.

I think Lance was staring into Jan’s face to see just how much gas he had left in his tank.

So today… let’s take a good long stare at the face of the market. Here’s a price chart of S&P500 futures with the volume of shares traded on the bottom.

See larger image

To extend the Tour de France analogy, think of price as the cyclist’s legs. Simply seeing them still moving, pushing the pedals up and down, isn’t enough to assess the rider’s energy level. Likewise, seeing market prices move steadily higher isn’t enough to prove the bull market is still strong.

You have to look at volume. That’s the “gas,” or energy, of the market.

S&P500 volume steadily declined throughout 2012 and has been equally lackluster this year. This is a clear divergence between price and volume – price is going up, volume is going down.

That’s a tell-tale sign of a market you should view with caution.

Now, I’m not saying the bull run is over. And anything the Fed does to get in front of a potential drop will certainly add gas to the tank. It simply pays to be diligent and cautious at this stage of the race.

Don’t worry – I’ll continue to share the best ways to navigate the twists and turnrns of today’s toppy market. Navigating the twists and turnrns of L’Alpe-d’Huez… I’ll leave that to the cyclists.