Carl Futia: Volume comparisons

Friday, June 05, 2009

Volume comparisons

Here is a daily chart of the S&P 500 showing a good part of the last bull market, the 2007-09 bear market, and the rally (which I think is the start of a new bull market) from the March '09 lows. I am posting this chart because of a comment just made by John M:

John M said...

There's a nice chart I saw on another blog that shows the relatively poor volume of the entire rally off the year lows. We are also hitting our heads on the 200MA.

It will be interesting to see if those broader 'warning signs' play out, or if we completely ignore them and move higher. If so, it wouldn't be the first time the market has sent one signal and done something else entirely.

6/05/2009 01:47:00 PM

It is my view that most people do not extract useful information from volume statistics because they don't make the correct comparisons. They usually look at the trend of volume within a rally or decline. But I think this is the wrong thing to look at. Instead the volume on rallies must be compared with volume on previous rallies and the volume on declines must be compared with volume on previous declines.

The relevant comparison for the current rally's volume is to the volume during rallies on the way down and to the volume during the 2002-2007 bull market. On both counts the volume on the rally from the March 6 low has been very high. Therefore I think that the volume has been telling us that a lot of aggressive, long term buying has been propelling the rally from the March lows. This is one thing that is telling me that a new bull market has started.

6 comments:

iv said...: Is it normal historically for yields on bonds to keep going up in a new bull market?; 6/05/2009 02:38:00 PM
Anonymous said...: iv, I agree with you. This is a highly abnormal stock market, mainly because it is being manipulated.

In light of the bonds crashing, the credit market is rejecting Bernanke's attempts.

As one would expect, normally, increased debt should mean higher rates due to higher risks for the lenders.

The bond market is much harder to manipulate as it is much larger than the stock market but the FEDs are trying to do even that and they are failing miserably.; 6/05/2009 03:20:00 PM
Unknown said...: Where do you draw the line in making such volume comparisons? We do not know how much more money has come into the market since 2002-2007 (due to 401k's, IRAs cap increases, etc). Furthermore, the ease of trading and banking has increased in the last few years, allowing the casual person to load up his/her brokerage account and trade. I guess what I am getting at is, yes, the volume looks higher, but is it an apple:apple comparison or something different (due to the reasons above).; 6/05/2009 03:33:00 PM
JM said...: Thanks, Carl, it's great to get your thinking on the matter.

The chart I was looking at (from NakedHedgeFund) was a daily chart of the past two years. When looked at in that time frame, it is clear that all of the rallies in this period have had notably less volume than the down moves. The point was that higher volume selloffs and lower volume rallies meant distribution has been and remains in effect.

Naturally, this can change moving forward--past performance being no indicator, etc. But it looks like volume has been declining the longer the rally continues, which at least argues for a downward correction. I know you've raised this possibility, also.

Looking at your chart going back to mid 2004, I can see your point, but I tend to interpret it somewhat differently. The run-up into late '07 was the final piece of the bull dating back 25 years, which would logically be marked by a certain exhaustion. The move down since then, marked by higher volume, shows that we entered a bear market, which is still incomplete. Currently, we're in a bear market rally. This is a very different type of move up than the (relatively) low-volume rally ending in '07. Bear market rallies tend to be more dramatic and vicious, as the past few months have shown.

I suppose the short version is, not all rallies are created equal, or words to that effect. You may well be right, I don't doubt that. However, from the looks of your chart and NHF's, I lean toward a less optimistic outlook for the months ahead.

There's no doubt that both of us will be watching as events unfold and, if necessary, adjusting our points of view accordingly. I remain an avid reader who holds you in the highest regard. Thanks for all you do.; 6/05/2009 05:18:00 PM
PM said...: Hi Carl,

Yesterday's pre-market rally reached the 956.60 level (give or take a few ticks) where my model tells me we should encounter heavy resistance. During this current rally, each time the market reached these key price levels, the market sold off, but then rallied above that level very soon thereafter.

The difference this time is that 956.60 represents a more significant price resistance point. For this reason, I would suspect that we may well see a sell off of meaningful proportions at this time. We've enjoyed an incredible rally for the past three months, but my model now tells me that the rally may well be complete and prices need to fall back.

The key price level I'm watching is the 922.30 level, if we close below that price at any time, then we could see a test and possible break of the 900ish level.

If we do work lower, then as we approach these key lower levels I'll keep you posted.

Thanks.

Kindest regards,

PM; 6/06/2009 06:30:00 AM
admin said...: Just want to let you know Carl that I really truly enjoy reading your blog! Keep up the good work! Blessed Weekend.; 6/07/2009 01:53:00 AM