The market was up hard today, but it was up on weak volume.  Total NYSE Composite volume was 3.73 billion shares, within the bottom quartile of daily volume for the year.

In fact, much of the volume came after 3:55pm, or at least hit the tape with five minutes to closing, when 600 million shares came across the tape.  Up until then, we were on track for the second lowest volume day of 2008.  Nearly 40% of the volume came in the last 90 minutes of the trading day after markets had made most of the gains. 

The positive spin is that the last minute volume was on the buy side, pushing the markets higher, and that today was the heaviest volume day of the week.  However, this has also been the lightest volume week of the year, with the four days averaging 3.45 billion shares.  In fact, Tuesday was the 15th lightest day of the year, Wednesday the 8th lightest and Monday the 6th lightest.  Tomorrow may be the lightest volume day as market participants are likely to head home early for the long weekend.

The market, of course, can still go higher on light volume, as occurred last year when the lightest volume of the year came off the pivot low after August 15, 2007.  From August 31 to the high on October 11, 2007, the S&P 500 rose 10.2%, though 3% of that move came on the last 105 minutes of September 18 when the Fed surprised the markets with a 50 bps cut in rates.  The Fed meets again on September 16, and may again surprise the markets, though that is unlikely, given that the Fed funds target is 2%, and the FOMC has shown no inclination to ease further, especially given the stronger than expected economic numbers this week.

Until a few days ago, I had thought the market was about to turn down again.  However, stronger than expected durable goods orders and a better GDP print due to better than expected net exports powered markets higher.  In fact, this move started at 2:30 on Tuesday, when the button-pushers started buying.  Since then, the S&P 500 is up 3%, the Dow 3.3%, the Naz 2.8% and the Russell 2000 4.4%.

The financials were amongst the biggest winners.  There has been some incremental good news regarding the GSEs (with the market apparently forgetting its fear that the GSEs were going under last week), but the primary driver of the market rally has been the positive economic news.  The good news relates primarily to exports, however. Financial companies are not the prime beneficiaries of net exports.  Thus it is unlikely they would be a top performer in the market. 

I think what happened today was that Russell is rebalancing its indices at the end of the month and financials are a big net buy.  With the much better than expected GDP figure, the hedge funds have a green light to the upside until the close on Friday.  Thus, hedgies started buying the financials, knowing that tomorrow at the close, they could sell their holdings to the indexers.

Indexers are concerned primarily about tracking error, i.e. how much they differ from their benchmark, which they want to minimize.  In their buying decisions, what matters to the indexers is how close they are to the final closing price of the day, not whether or not the stock is a good buy.  All they are trying to do is hit the final print.  Thus, the hedge funds buy today knowing they can sell tomorrow to price-insensitive buyers.  With the upward bias exacerbated by light volume with Wall Street away until Labor Day, its no wonder the markets were strong.

Unless there is significant bad news, it is unlikely Friday will be a negative day for the stock market, and the bias most likely will be the upside.  However, when Wall Street gets back from vacation on Tuesday, we will face an overbought situation with the market facing resistance and fresh concerns about the credit market.