Stocks continued to march higher last week. The S&P 500 added another 2% to what has been a good start to the year. Helping to fuel last week’s gains were strong economic numbers and a nice start to earnings season.
What has been noticeably absent from the rally is a big uptick in volume. We haven’t seen a billion shares traded or more since mid-December. Clearly there is still pessimism out there from many market participants.
The lack of huge volume can be interpreted two ways. On the positive side, I always find it a good thing when there is a healthy dose of “naysaying” in the market. The wall of worry helps stocks move higher and eliminates the risk of a crash when the fuel runs out.
On the negative side, we need strong volume and numerous buyers to bid up the prices of stocks. It is a simply law of supply and demand. When demand is low prices will have a hard time sustaining current levels.
Ultimately the sustainability of stocks continuing to move higher will depend on the economy. Most primary dealers believe that the Federal Reserve will need to infuse more liquidity into the markets to keep things going.
Despite short term improvements in domestic economic activity, the economy has benefited from a recovery in Japan that may be a blip instead of a trend. With unemployment still high and wages stagnant, more fuel will be needed to assist the fragile recovery from the depths of near financial Armageddon in 2008.
With inflation very low the path for more intervention is clear. Perhaps that is why stocks have done as well as they have without broad based participation. If we do get a big stimulus effort from the Federal Reserve, double digit gains this year is a near certainty.
We have plenty of companies reporting earnings this week.