We're three weeks away from what many believe to be the single most important election in recent history. The markets have cautiously pulled back in anticipation of what appears to a heated battle for the most highly coveted political position in the world. After last night's debate, everyone seems to have even more conviction for their preference as to who will be put in office. Do the markets really care? At first glance one would think no, however, if you peel apart the indicators, there's something glaring going on underneath it all that's putting these markets in a very critical position for something very big to happen... very soon. Yes, the major indexes across the board have pulled back over the last few weeks, the short-term charts have a bearish trend, the longer-term charts are still bullishly intact, but depending on which index you're looking at, you can make a number of arguments going in both directions. The S&P and the DOW both appear to be the stronger contestants of late with the NASDAQ being the laggard for once. We've said for a long time the NASDAQ has been the leader of the rally, but there does seem to be a rotation into more defensive names since the market topped out in mid- September. It shouldn't go without notice the S&P and DOW both are now back above their 3X3 DMA's on the weekly charts as of today, which is a strong vote of confidence suggesting this market wants to go higher. If you read yesterday's edition, we pointed out where the NASDAQ needed to get to for us to be convinced we're going to see a new leg up. Well, from a technical perspective, the S&P and DOW both have retraced a complete 5/8 retracement now of the move lower from mid-September, and the NASDAQ is seeing continued follow through on the heels of yesterday's sharp move higher. We knew we'd soon see, at the very least, a very tradable relief rally, and we're seeing it now. One would think that's a strong signal this market is going higher. So aside from economic concerns, which Wall Street loves to climb a wall of worry anyway, and aside from a mixed bag of third quarter earnings so far this week, which also doesn't seem to be cause for a massive selloff, then what's the big underlying factor that's causing concern for us even though things don't look so bad on the surface? Volumes. Just look at the major index ETF's, the QQQ's, SPY's and DIA's. The most glaring of declining volumes is the SPY's, which represent the S&P 500. I've included a weekly chart of the SPY's for you here so you can see just what I'm referring to. I generally don't draw trend lines with volumes, but other than the June low, where the markets were met with a huge volume spike (and for good reason), look at how volumes have continued to decline ever since. No bueno. What I also find interesting is since large institutions and big funds tend to be a huge part of the S&P 500's participation, it almost appears as though they're sitting on the sidelines right now. That's generally not a good sign because without big money flows coming from these 100 pound gorillas, the markets are subject to a lot of little games. I've also included a weekly chart of the NASDAQ's volume and you can clearly see here that volumes have been on a steady decline ever since the middle of last year. Sign of the times? Wall Street and the media have continued to suggest there's all this money sitting on the sidelines just licking their chops to jump in. OK, let's see it. Just like investors and traders should always be careful with low volume individual small cap stocks, the same goes for the major markets and even large caps. Volume's most important role in the markets regardless of whether or not it's a penny stock or the biggest of large caps, is to create a fair and orderly market. Volume ensures a fair price as long as high volumes are consistently maintained with the idea in question. That's a great lesson for those who participate in many of our small cap ideas. When a small cap moves a lot higher or lower on low volume, that should tell you a lot. Don't trust the move as much as you should trust the volume associated with the move. A big move on low volume can suggest a great buying or selling opportunity depending on which direction the idea is going. Bottom line is this. When you love an idea and it sells off hard on low volume, don't be afraid to jump in. Isn't that what's been going on over the last few weeks? Conversely, let's say this market goes crazy to the upside on low volume. That would be cause for concern going the other way. While so many traders and novice investors pay so much attention to a chart's direction and all kinds of other technical tools, remember volume is probably the single biggest indicator you can use. What happens to an idea on huge or low volume is just as important as the move the idea is making. When big volumes return to the major index ETF's and individual stocks, then pay close attention to the directional movement and other technical tools. That's probably going to be the single biggest clue we're going to have toward determining what the markets want to do in the months ahead. By the way, with respect to this week's rally, options expire at the end of the week, so it's really no surprise this market is moving higher. Options makers love to clean things up the last week before expiration. Again, more little games due to low volumes.