U.S. equities staged an impressive rebound off of Friday’s deep selloff. The Dow gained 580 points, the S&P jumped nearly 1.5%, the Nasdaq Comp up 1.2% and The Russell 2000 spiked a whopping 3.1% in today’s session.

Given the nature of my evening notes of late, you’re probably wondering if today’s “internals” supported the bullish message in the price action.

Well, as you’ve been reading herein, the pattern has been one of big conviction on the big down days, not so much on the big up days. Today, however, was very good in terms of breadth (for the S&P 500), but, alas, not so good in terms of volume.

You see, volume is key when we’re assessing conviction. For example, if stock prices rise a bunch, as they did today, but you have markedly below-average volume, as you did today, it suggests that the day was more about stubborn sellers (demanding higher bids) than it was passionate buyers.

Contrasting today’s 580-point Dow rally with last Friday 730-point selloff; today saw 40% below the previous day’s (Friday’s) volume, while Friday’s volume number was 61% above its previous day’s. Looking at today versus the 5, 10 and 20-day average volume, it came in at 16%, 17% and 21% below. As opposed to Friday delivering volume at 36%, 42% and 32% above those averages, respectively.

While, again, volume is key in measuring commitment among the players, breadth is very important as well. As for today, in breadth terms, the rally was impressive with regard to the S&P 500; 89% of its members closed in the green. The Nasdaq Composite Index, however, was just okay relative to its price move; with 65% closing up on the day. Friday’s plunge, by the way, saw 89% of the S&P’s members in the red, while 78% of the Nasdaq Comp’s constituents bled as well.

I’ve been making a big deal the past few weeks out of the big net short interest positioning among S&P 500 Index futures traders. We’re talking multi-year bearishness per the charts I’ve featured herein.

Well, it looks as though those futures bears are finally getting a bit tired of getting killed. Tired, that is, of watching stocks rally, being forced to cover (i.e., buy their way out of their short positions), and lose money — while adding some serious oomph to the rallies in the process.

Not that they’ve performed a complete 180 and gone net long (bullish), they’re just notably less net short than they’ve been in a while:        click each insert below to enlarge…

Further evidence that there’s fewer folks betting on a fall these days comes from short interest data (blue line) for SPY (the ETF that tracks the S&P 500):

As well as, and especially, within the NYSE (New York Stock Exchange) overall:

So what can we glean from the latest short interest data? Well, it means we shouldn’t be surprised if the rallies to come don’t fade a little quicker and give way to a bit more downside action.

In fact that’s kinda been the look since early June:

S&P 500 Index:

The first arrow pointing to the red candle at the bottom marks the day I wrote this article. The second arrow pointing at that red arrow near the top marks the day I wrote this one.

Now, if you happen to read those two articles I want you to absolutely know that they in no way whatsoever are meant to suggest that I have some unique soothsaying prowess. Clearly, I don’t! I’m as prone to looking utterly clueless on any given day as the next analyst. In fact, case in point, I definitely did not see today’s big rally coming. Those articles did, however, reflect my assessment of the then real-time reality of market internals and sentiment and, thus, the at-the-moment probabilities they portended. I.e., odds favored certain short-term outcomes. Of course, as you know, market action doesn’t always jibe with what “the odds” might suggest. And the odds themselves, when we’re talking short-term setups, can turn on a dime.

Bottom line, we crunch the data like you can’t imagine (from multiple angles) to get a feel for general conditions every step of the way. And, yes, while we’re not short-term traders, in addition to all of the macro work we do, we’re forever looking for clues in the daily trends that might either confirm or conflict with our longer-term thesis.

Have a nice evening!
Marty