Low Volume

Some better-than-expected economic news helped the bulls deliver a very upbeat three-day rally in front of the Labor Day holiday. Of course, volume was very light all week, and that always worries the technicians, but this is a market that feasted on low-volume rallies after we bottomed in March 2009.

Just a few days ago, we had bond yields going to almost zero as market players fretted over the possibility of a double-dip recession. We probably just had too much negative sentiment, because the economic data that triggered this three-day bounce weren't anything really fantastic. We simply had already priced in something even worse.

Next week, volume will pick up as everyone returns to work after Labor Day. The indices and many individual stocks are now overbought, and while we have cut through some overhead resistance this week, there are still some major hurdles out there.

We have very little news on the calendar for next week. No major earnings reports are scheduled, and about the only real economic news is the Beige Book on Wednesday and weekly claims on Thursday.

Without any major news catalysts, some will focus on sentiment. One of the benefits of a sudden, low-volume, three-day rally like we just had is that a lot of folks missed out, and this creates a supply of buyers who want to buy a pullback. Those dip-buyers are what helped this market move straight up for much of last year and back in March and April of this year. I'd be surprised if they have the same tenacity again, but you have to be very careful about underestimating how far these sorts of rallies can carry.

The biggest hurdle for this market remains the highs we hit back in August. We still have a long way to go to return to those levels, but if we can consolidate and hold above some support levels for a while, we will be in good shape for an attack.

Whether a lull in the news flow is good or bad depends on the momentum. Right now the bulls have control, but we may be extended and ripe for some profit-taking, especially if we have another one of those gap-up opens on Tuesday morning.