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A Word About Volume

Since March 2009, the norm has been low buy volume rallies on the major indices, followed by high volume sell-offs. Analyzing individual stocks based on volume has usually been far more instructive than spending time making the bear argument that the broad market is running on fumes and being distributed by heavy sellers on each pullback. And the evidence to support that idea is the fact that the bull run since the March 2009 lows has continued up through 1700 on the S&P 500 Index, with the Dow and Russell 2000 printing all-time highs in their own right.

However, that volume argument (again, for the major averages, not individual stock analysis) of low buy volume rallies and heavy sell-offs coincides with a continued secular bear, with low overall participation and a general disdain for equities, even as stocks rise. Many notable market technicians and pundits continue to pound the table on the idea of a new secular bull already in action. Even with the major indices at all-time highs, however, in prior secular bears, like the 1966-1982 one, we have seen the major averages print new all-time highs before slumping again. In and of itself, that is not enough evidence.

So my point is this: In the short-term the volume argument about the major averages is nothing more than a bear talking point.

But in the long run, looking out months, quarters, years, it is indeed valid.

To back that up, consider the following article from The New York Times back in August of 1982 (when the great secular bull from 1982-2000 began). I have bold-faced the relevant points about volume.

Now THAT is typically what you see in a new secular bull…


Published: August 24, 1982

The stock market extended its strongest rally on record yesterday as the Dow Jones industrial average rose to an eight-month high. Trading volume on the New York Stock Exchange, fed by heavy buying by pension funds and other cash-rich institutions, surpassed the 100-million-share mark for only the second time.

”What you saw was pure panic buying,” declared William G. Garrison, president of Garrison, Keogh & Company, an investment advisory firm. ”Institutions are telling their money managers to commit funds to this runaway market.”

The Dow Jones industrial average, the index of 30 industrial stock prices that signifies the stock market to many investors, rose 21.88 points, to 891.17, on the strength of a final-hour rush of buy orders. The close marked the highest level for the key average since Dec. 10.

In the last seven sessions, the average has climbed nearly 115 points. ”There’s never been an advance of that magnitude in such a short time span,” stated Paul F. Mangels of Bache Halsey Stuart Shields Inc. Rally May Point to Recovery

Analysts said that if the market’s remarkable performance continued, it would signal a recovery for the nation’s slack economy for early in 1983. In the seven economic recoveries since World War II, a rebound in stock prices has preceded the start of a business expansion by anywhere from three to seven months. The average was six months.

Most Wall Street professionals now believe that the stock market registered its low for this cycle on Aug. 12, when the Dow industrials reached a 27-month low at 776.92.

”It was precisely the fear of an ominous recession ahead, along with recent strains in the nation’s financial structure, that caused the Federal Reserve to encourage sharply lower interest rates,” said Howard J. Abner, chairman of Abner Herrman & Brock Inc., a brokerage firm. ”High rates had choked the economy. Now the Fed has turned its guns from fighting inflation to fighting recession.”

The spectacular performance yesterday caught many analysts by surprise. Traders had expected investors to take some profits after last week’s gain of 81.24 points in the industrial average and a weekly record of 455.1 million shares traded on the New York Stock Exchange.

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  1. e1tan

    great post chess

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  2. jimmy_two_times

    any comment on the dark pools and how volume may be misrepresented on instruments?

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    • chessNwine

      It is an interesting counter point…To me it sounds a bit like “this time it is different” but I understand it is a different landscape.

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    • e1tan

      the use of dark pools means that the volume of the trade isnt counted? seem odd since the only thing u cant c is the bidder or the seller

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  3. rynobolt

    Do you think there’s any credence to the idea that total money volume (shares x price) could be another way to gauge sentiment instead of solely looking at share volume?

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