HAUKE: Lower trading volumes suggest trouble ahead

As summer approaches, people all over the northern hemisphere turn their attention to pools, beaches, baseball and cold
beer. These same people will often take their minds off the stock market and their portfolios, which
explains why volume on the major exchanges tends to dwindle away by early August.

However, we are not in peak vacation time yet
and already volume is disappearing faster than a hermit crab being chased by a group of 10-year-old boys.

Volume is the stuff of power. Think of a car
moving down a highway. As long as the gas pedal is pressed, the car will keep moving. The more gas you
give the engine, the faster the car is going to go. Run out of gas and the car can keep moving, for a
while. That is exactly where the stock market finds itself right now. The car is still going, but it looks like it is out
of gas.

The stock market
was rallying pretty hard from March 9 until May 8, at which point it settled into a three-week-long trading
range. The range was broken to the upside on the first of June, followed by a series of slightly higher prices.

The problem with the breakout and higher prices
is the volume. It has been steadily decreasing since that May 8 high. This is especially troubling if
you are a bull. New bull markets, which March 9 was supposed to have launched, never see volume taper
off this soon into the move. It is quite common, however, to see volume quiet down in the latter stages of bear-market
rallies.

The same thing
happened last spring. The market took off from early March until early June. The entire move was characterized
by lower and lower volume. It was one of the strongest indicators that the rally was going to falter soon and, by September,
the market was on its way to dramatic new lows.

There have been two stocks that have really personified this rally dating to early March. Goldman
Sachs and Apple Computer have captured the attention of professional and retail investors alike, rising
100 percent and 80 percent, respectively, in three months. It is always a good idea to keep an eye out
for sectors and individual stocks that are leading any intermediate-term move, whether to the downside
or upside.

In this case,
GS and AAPL have done well, but volume could be a major factor in keeping a lid on both of these stocks the
next several months. Goldman saw volume peak in the middle of April when the stock was trading for $113 a share. It recently
hit $150 with far less volume coming in every day. Apple has seen volume trend down since last fall—this despite a move
from $80 to $145 a share.

If you own Apple or Goldman, keep them on a tight leash. If this low volume means we are in a bear-market
rally, leading stocks can get hit sharply and powerfully.

An obvious coming victim of the slower volume are the discount broker dealers such as Schwab and
TD Ameritrade. Companies like these will be vulnerable throughout the summer months. The slower trade
also puts the entire rally from the March low under a cloud of suspicion.

Bull markets, especially early, depend on ever greater levels of participation to keep them going.
For those who believe March 9 was the birth of a new bull market, I advise you to pull in to the nearest
filling station. Your gas light is on.•

Hauke is the CEO of Samex Capital Advisors, a locally based money manager. His column appears every other week. Views
expressed here are the writer’s. Hauke can be reached at 203-3365 or at keenan@samexcapital.com.