One of the charts I sent to Thrasher Analytics subscribers on Sunday looked at the large increase in stocks that were trading below average volume on Friday. Since the end of last year, this has been a bearish development for markets, a sign that buying has become exhausted and counter-trend rallies ended. However, this isn’t always the case. In fact, in strong bull markets we see the market give a completely different response to these low volume spikes. Because of that, we can use this type of data to assist in identifying the type of market we are in. Let’s look at some examples.
Each chart I’ll share below will have the same types of data but look at different periods of time. On top will be the S&P 500, in the middle will be the percent of S&P 500 stocks that traded each day with below-average volume, and in the bottom panel (in red) is the same data but only shows the days that the market closed above the open and there were more than 50% of stocks trading on below-average volume (this allows us to more clearly see the instances of days with lots of low volume).
1996 to 2004
First, let’s go back to the DotCom boom and bust. From 1996 until the peak in 2002 we had several occurrences of over 50% of stocks trading on low volume, and what did the market do? For the most part, ignored it. Bulls were in charge and demand was so strong that it didn’t matter if volume was low or not. Then things began to change in 2000. The market began to go sideways with these days of most stocks trading on low volume. This became a sign that potentially buyers were becoming exhausted. Then the trend changed, and the Index began to go down through 2003. Each counter-trend rally was ended when stock volume dried up. After the market bottomed and an eventual new up trend began to form, the market went back to ignoring these low volume days once again.
2007 to 2010
Now we have the Financial Crisis. Going into the eventual 2007 peak we can see, once again, the market moving higher despite a pick up in stocks trading on low volume. But once we went into a bear market down trend, those days mattered – putting an end to each counter-trend advance. But look at the far right of the chart in late 2009, volume was low, due to Thanksgiving and Christmas, but we still saw markets rally higher, the regime had shifted.
2012 to 2015
One of the strongest years over the last decade was in 2013. Look how in 2012 and 2013 the market moved higher even with most stocks seeing days of below-average volume. Again, the bulls were in charge and demand stayed strong. Then in 2014 we saw the major averages consolidate. The below-average volume began to matter again as bulls didn’t carry the same control as they had in prior years.
2021 to Current
Now we have the last 18 months. Bulls had full control of equity markets in 2021. Even though there were days most stocks traded on little volume, buyers ran the show. Then notice in mid-August we had 58% of large cap stocks trade on below-average volume and the index didn’t rally but went sideways-to-down. Looking back, that was a sign that the regime may have begun to shift out of the bulls control. Then we kicked off the new year and in 2022 markets have moved lower. Each time bulls made an attempt to regain control with a count-trend rally, it resulted in a lack of buyers and a lack of volume which put an end to each bounce. On Friday about 62% of stocks traded on low volume and as trading started this week, the S&P 500 fell 1% on Monday – suggesting this theme and the bearish regime is still ‘in play.’
These days it seems volume is often dismissed. Traders argue that high frequency trading has mucked up the data, making it no longer a useful tool. I strongly disagree. However, I will note that we can’t view volume data blindly. Drops in volume around holidays or days with shortened market hours are important to recognize when doing analysis.
The above examples show how we can still evaluate the health of the market based on if individual stocks are trading on low, high, or average volume. With this data in hand we can begin making conclusions if the market is in a bearish or bullish regime and evaluate how the market ‘reacts’ to these changes in volume as signs of those regimes changing.
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