Thursday, June 16, 2005

Is Low Volume Bearish?

Some technical analysts have hinged their bearish views of the stock market on the fact that trading volume has been relatively low on the advance from the April lows.

I think this will prove to be a mistaken analysis. The thing to remember is that low volume on a rally to a lower top is only significant if it represents a real change in the market’s behavior. In particular, the previous high should have seen a fair amount of excitement and good volatility. If, after a top associated with lots of volatility and volume the market should rally to a lower top on low volume, then one has a definite bearish indication. But if the first top was itself a dull affair, like the January and March 2005 tops in the S&P, then we don’t learn anything from a subsequent rally that is also dull.

Over the last 16 months the Dow Industrials and the Nasdaq composite have traded sideways. Every investor who wants to take advantage of prices near current levels to buy or sell has had ample opportunity to do so during that time. The only buyers and sellers left in the market are short term speculators. So volume is low and won’t increase until the averages break out above their April highs. Such a breakout would present new opportunities to long term investors to readjust their portfolios and will naturally result in a big increase in trading volume.

No comments: