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August 26, 2012 / redman59

Low Volume Argument and What Two Leading Research Sites Have to Say

Volume tends to be the go-to excuse for bears as this market keeps grinding higher.  While I have nothing new to say, I wanted to share two articles that highlight on why volume on the indices should not be a factor in your bull/bear case.  This first article comes from Ryan Detrick who is the Senior Technical Strategist at Schaeffer’s Investment Research.  This article is probably one of the best that I have come across since paying attention to these volume arguments going all the way back to the beginning of this rally in 2009.  The article is titled “Why Low Volume Is Actually Bullish” and brings data that goes a little deeper than just look at volume on the indices.  I suggest reading for yourself but here are some key highlights:

  • Number of stocks above $100 and the average price of shares in the S&P 500 are both near 22-year highs (Michael Santoli of Barron’s)
  • Dollar volume, indeed, is up slightly from 2010 (Michael Santoli of Barron’s)
  • AAPL, CMG, and GOOG’s of the world are the ones traders play now
  •  Costs more to buy these stocks, so people don’t buy as many
  • Quantified data shows total-dollar volume is indeed less than during the peak of the financial crisis. However, it’s also still well above the bull market from 2003 to early 2007
  • Total options and futures volume made a new high last year, and has been increasing every year for the past three years

Overall this is a good read with statistical data.  Also I like the options and futures argument and believe this holds true as even more retail traders, such as myself, prefer the futures/options market for leverage.

Next article comes from a tweet I saw today from @Attitrade (a suggested follow) that shared research from Bespoke Investment Group (a leading research site IMO).

I suggest clicking on this link to read the full research notes but here is a summary with picture of what I read:

  • Currently the 9th longest & strongest bull market (going back to 2009) in history
  • S&P 500 is up 108.50% from 2009 low
  • Count only days where volume was above its 50-day moving average the S&P 500 return is -30.1%

Below is a picture courtesy of Bespoke Investment Group:

My takeway, despite what you hear on TV about low volume keep in mind they are talking about the indices alone.  There are many stocks that continue to push higher on higher volume and this is what you need to focus on, not index volume.  If you are measuring index volume, then look at if volume exceeds the prior days volume, rules characteristic of how Investors Business Daily measures accumulation/distribution days.  I still believe in the single stock volume surges for institutional participation but also remember overall price is the only thing that matters, everything else are supporting factors.

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