Watching Trading Volume Fade . . .

A few weeks ago, someone responded to a discussion about economic slowing with the following comment:  "Price and Volume tell all."

Fair enough: "What has VOLUME been telling you over the past few weeks?" I asked. Given the run off of the March lows has come on decreasing volume, its an important question.   

Barron’s resident technician, Michael Kahn picked up on the same idea in a recent analysis:

THE STOCK MARKET HAS PUT on a nice show with the Dow Jones Industrial Average rising some 5.5% off its March 14 intraday low. Along the way, it has ignored several technical barriers and even saw one major index, the New York Stock Exchange composite, set a new closing high.

But from the start of the rally through this week’s action, trading volume has been conspicuous by its absence. Without volume, the market will soon run out of fuel, and under such conditions we cannot expect it to run much longer.


We have noted a similar issue with overall market volumes. Even worse than low volume is the increasing volume during selloffs, and decreasing volume during rallies. This suggests to me that we are now transitioning from a period of accumulation (institutional buying) to a period of distribution (broader selling). 

Its not limited to the NYSE or S&P. Trading on diminsihing volume is seen on many popular ETFs, including Dow Industrials (DIA), Nasdaq 100 (QQQQ) and other commonly traded ETFs. Kahn notes that "exchange-traded funds such as those covering the Dow, S&P 500, Nasdaq-100 and Russell 2000 all show the same volume declines, and this confirms that this condition is truly marketwide."

"Of course, volume can pick up at anytime and that would change this analysis. However, we can only analyze what is actually on the charts now and draw our conclusions from the evidence presented.

With most major indexes well below their February peaks, which are respective resistance levels, and volume drying up at a steady pace, the conclusion has to be that the stock market is now running on empty."

That’s a fair warning. We will be watching volume
activity closely over the next few days and weeks to see how this
develops further . . .



Stock Market Is Running on Empty
Michael Kahn
Barron’s April 11, 2007

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What's been said:

Discussions found on the web:
  1. S commented on Apr 22

    One of Kudlow’s frequent guests who has been calling for a mild recession, Professor Smith, was challenged this week by LK about his recession call citing the strength in the stock market.

    The professor commented that the market was looking past the recession and discounting the 2008 economic boom that will follow.

    I believe Roubini’s work suggests the average equity market decline leading up to and during recessions is around 28%. Has there ever been a recession that didn’t include a correction of at least 10%?

    On another note, Paul Kasriel published another excellent piece on Friday.

  2. Michael C. commented on Apr 22

    Come on, Barry. What’s up with the “old” analysis & chart? The S&P isn’t at 1437. Last I checked, it closed at 1484 and volume has been ticking up all month since it’s 1440 breakout.

    Here’s a link to a current chart.

  3. Nova Law commented on Apr 22

    Price and volume are important indicators of future direction, this is true. But they can also be misleading, or they can be not be predictive of future price movements at all.

    If you look at this exact chart, one can easily see that prices advanced on steadily diminishing volume in August 2006, just as we’re seeing now. And subsequent to then, market prices continued a long, strong advance. These factors are worth watching, but are hardly foolproof indicators of future returns.

  4. DavidB commented on Apr 22

    It looks like Michael C. trumped you that time. That’s at least a three week old chart. We’ll have to give you a mulligan.

    Current chart is here. Michael’s didn’t work. Volume appears to have returned.

  5. RMX commented on Apr 22

    As you may have heard, a couple of the online retail brokerages were disappointments this past week; indicating that “the little guy” might not be buying into this rally. Someone from optionsXpress even said as much during an interview on CNBC. Now we all know where the bulk of the market’s trading volume comes from but perhaps, on the margins, retail volume might make the difference between mediocre and above-average volume?

    So is retail going to get screwed again? I don’t know one way or the other but we may find out soon when the big boys push the Dow and SPX over 13000 and 1500 respectively. It was 71 years between 1929 and 2000 but maybe 7 years is too soon to try the same scam again? I have to admit I would find it hilarious if the big boys discover that retail doesn’t show up at the top this time and they have no suckers to unload their inventory on. Then again, who was it that said “nobody ever went broke underestimating the intelligence of the American public”?

  6. m3 commented on Apr 22

    if thin trading volume is the best that we bears can come up with, it’s pretty sad.

    volume on the NYSE was actually pretty healthy on friday.

  7. peter from oz commented on Apr 22

    there are none so blind than those that will not see
    just reread maury klein’s ‘Rainbow’s End’ suggest you all do the same

  8. Chief Tomahawk commented on Apr 22

    So what does the old saying “Sell in May & go away” foretell?

  9. Winston Munn commented on Apr 22

    This time of year is historically very good for equites markets as tax season refills the coffers of the treasury. Without the Treasury’s competition for currency, there is less pressure on money supply (lowered demand) and more can flow into equities. Once we get into May, the tax party is over and the Treasury once again has to start borrowing, becoming a competitor for currency and thus inceasing the pressure (demand) for currency. More treasury need means less less available for equities. Whether the current poorly attended party can find legs and with late arrivers will be dependendent on the amount of the FCBs’ treasury buys and the Fed’s SOMA actions. If FCBs start to reign in their buying, while the treasury increases their demand, the Fed will have no choice but to expand the money supply, creating additional inflation, and this is not what the partygoers came for.

    Hence, the birth of the idea to “sell in May and go away.”

  10. ManhattanGuy commented on Apr 22

    Barry – nice try.. you posted an old chart. S&P is closing in on 1500. I feel sorry for you bears. Next thing you know Barry will be reposting all subprime meltdown news. Volume has been healthy in the last week or so.

    BR: Yes, from last week — The chart is from the Barron’s article (its dated April 11 2007), and that is disclosed in the sources section below . . .

  11. Winston Munn commented on Apr 22

    Sorry for a second post so soon, but there is something I have been watching that so far appears to be of more value (at least to me) than strict volume/price. What I have been comparing is the total volume of a move compared to the change in price to arrive at a dollar-per-million-shares-traded ratio.
    There are many ways to do this, but each way indicates to me the strength in the move.

    Out of curiosity I did this on the S&P from July price of 1240 to the high of 1460, and got a ratio of .014. I then compared it to the correction runnup ending with Friday’s close and found the ratio had dropped to .006. A higher ratio means to me that buyers are willing to match the ask more requently, a sign of strength. A large change in this ratio I have found (with limtited sample) is a signal for a failed rally.

    What I am trying to quantify is how strong is the buying demand. I prefer total volume to upside or downside volume as then the ratio shows how much more strongly one side or the other is winning the tug-of-war.

    From this perspective, the current move up looks like it has strong chances to be a failed rally.

  12. John commented on Apr 22

    “From this perspective, the current move up looks like it has strong chances to be a failed rally.”

    However, from the liquidity trumps everything perspective, we should add two or three hundred more Dow points by week’s end.

  13. Winston Munn commented on Apr 22

    “However, from the liquidity trumps everything perspective, we should add two or three hundred more Dow points by week’s end.”

    John: 200 doesn’t seem out of line. After all, the Treasury doesn’t have to start borrowing again until next week.

    Maybe I should have said, “The makings of a failed rally,” as this looks to me like more of a last hurrah than a start of new, strong upleg.

    But then, I always liked Jesse Livermore’s line: “Markets are never wrong; opinions often are.”

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