2009 Rally had Higher Prices on Declining Volume:

The stock market bottomed in March of 2009 and then had a strong rally that lasted through the end of the year. The rally took the Dow Jones Industrial Average 60% higher off of the March lows closing out the year at the 10,428 level. The problem is that the Dow continued to move higher throughout the year, but overall volume weakened as the year progressed. Weak volume suggests that as the market moved higher, investors became more skeptical of the sustainability of the rally and they were not buying into it.

Take a look at a weekly chart of the Dow Jones Industrial Average. I have drawn a green rising trend line to indicate the stock market rally, and a downward sloping trend line to show the declining volume. This divergence suggests that the rally is running out of steam as less and less investors are stepping up to buy at these extended levels. The first week of 2010 may be the tipping point that sends the market lower. Volume tends to be extremely strong the first week of each year as everyone heads back to work.

Dow Jones Weekly Chart

Many analysts believe that the average investor has missed out on the rally and they are sitting on the sidelines waiting to invest their cash. While this may be true, there are also a lot of investors waiting to hit the sell button and cash in on their recent gains. The market crash of 2008 is still fresh in their minds, which means they are more likely to panic in the event of a huge sell off. Will the investors on the sidelines have the guts to step up and buy into the sell off?

In early 2010 the Dow will have a strong drop and volume will surge higher. Investors who are sitting on lofty gains from 2009 will sell in a panic in order to preserve their gains. Volume will likely reach levels not seen since the early part of 2009. The correction should be strong enough to minimize the chance that the markets will move to a new high in 2010. Whether this drop will reignite the bear market is yet to be seen, but it is still a great possibility.