Using traditional measures, volume has been falling since the
'07 market top. Using more comprehensive measures, market
volume peaked during the '09 crisis and has fallen off since then,
even as prices have risen.
The fact that volume is down and continues to trend negatively
is no disputed fact.
What is disputed however is the importance of volume and if the
declining volume on the back of the rally (NYSEARCA:VTI) since 2009
is meaningful or not.
Traditional Volume Rules
Traditional Technical Analysis teaches us a few key points:
Rising volume on rising prices (NYSEARCA:SPY) is normal
Volume normally leads price (SNP:^GSPC) during a bull
move. A new high price (NYSEARCA:IWM) that is not confirmed
by volume should be regarded as a red flag
Rising prices (NYSEARCA:DIA) and falling volume are abnormal and
indicate a weak and suspect rally
Many media outlets however shrug off the weakening volume
rally. Recent articles include:
"Volume Matters? Think Again" - Wall Street Journal
"Is Low Volume Actually Bullish?" - Marketwatch
"Is Low Volume Really Bearish?" - Schaeffer's Research
Volume No Longer Matters?
The main argument is, prices have risen since the 2009 lows
although volume has been declining, therefore volume doesn't matter
anymore. This seems a little shortsighted to me.
To assume something doesn't matter because at the present time
the expected outcome is not occurring does not mean that the
expected outcome won't eventually occur. This is like saying
it is sunny outside right now, so a thunderstorm won't happen
Or if you prefer a financial analogy, the housing market has
always gone up in price, therefore there is no risk of housing
Just because the market has risen on less and less volume, does
not mean volume should be disregarded as unimportant or that price
eventually won't correct back to historical norms.
Volume Should Decline as Price Rises?
A more solid argument is that volume should decline as share
prices go up as the total dollar value traded (volume * share
price) remains roughly the same. It does make rational sense,
and a good example is a stock split such as the one that occurred
with Citigroup (
) on 5/9/11.
Previous to the split, Citi's price was in the low single digits
and volumes were huge. But after a 10-1 stock split it traded
around $50 and volume declined significantly. This specific
case was actually a popular argument as to why volumes were down in
But, if this is the reason for declining volume, then the
average dollar value traded in the markets should be roughly the
same through time. Any change in price would be offset by
change in volume.
But, this too is not the case, and history tells us so.
Introducing ETFGuide's TCT indicator
The below chart and analysis was created for the
Profit Strategy Newsletter
subscribers on 11/16 and shows the Dow Jones Industrial Average
(NYSEARCA:XLI) in red compared to our Total Capital Traded (TCT)
Index in blue. During the 1990's (label 1) and 2000's (label
2) bull markets until the Flash Crash of 2010, total capital traded
followed the stock market's ups and downs (DJI:^DJI) very
closely. This was all healthy and normal. Volume rose
with price, as did TCT.
But something happened after the Flash Crash in 2010.
Markets kept rising although total capital dried up. And
drying up it continues as volume shrinks faster than prices
Notice also that the budget crisis in 2011 brought prices back
in line with total capital traded on its quick 20% selloff.
Since then capital has again dried up, actually taking total
capital traded back to late 1990's levels at under $10B/day.
With average daily TCT backbelow $10 Billion it is clear the
market's rally since 2010 is abnormal and not built on normal
supply and demand metrics. This indicator is also potentially
warning us that in order to bring prices back in line with demand,
another big selloff, or Rogue Wave (
), may be lurking around the corner .
Profit Strategy Newsletter
includes a detailed analysis of various market forecasting tools,
along with a short, mid, and long-term outlook for the U.S. stock
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