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Is Low Volume Really Bearish?

Schaeffer's trading team tackles the negative sentiment surrounding this bull market

by 9/6/2012 3:11:34 PM
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Despite a rally of more than 100% off the March 2009 low, it's not hard to find the bears. They are a loud and vocal group, screaming about everything from Europe and Bernanke, to the labor market and the dying consumer. When they talk about the stock market rally, one of the big knocks is that volume has been light. Tough to argue, because it has been. But what stands out about this argument is that it's one we've heard from the bears since mid-2009.

In today's installment of Trader TV (see the video below), Ryan Detrick and I take this issue head on. While Ryan believes we've lost a generation of traders since the financial crisis, I point toward some simple math to explain the slide in volume. Ryan even pulled in our Quantitative Analysis Department to get some quantified data to back it up. Here's a rundown of our discussion:

  • In 2009, we were in the midst of a financial crisis and a generational low. Well, volume generally surges at major bottoms much more than it does during steady up trends. Comparing the March 2009 bottom with today's market is apples and oranges.

  • It's simple math. The market has doubled over the past three years. So, it's safe to say most stocks have probably doubled as well. If it costs more to buy a share of a stock, people won't buy as many. In addition, various banking stocks (trading under $5) accounted for much of the volume back in 2009. Now, the big, sexy names are the ones worth several hundreds of dollars. The Apple Inc.'s (NASDAQ:AAPL), Amazon.com, Inc.'s (NASDAQ:AMZN), and Google Inc's (NASDAQ:GOOG) of the world are the ones speculators play now. Of course, a trader can't buy as many shares of GOOG at $600, versus Bank of America Corp (NYSE:BAC) when it was $7.

  • With their continued underperformance, there aren't nearly as many hedge funds as there were just a few years ago. Throw in some of the issues we've seen from the high-frequency trading (HFT) crowd -- think Knight Capital Group Inc. (NYSE:KCG) -- and again, less volume is totally logical.

  • In a recent Barron's article, Michael Santoli wrote that the number of stocks above $100, and the average price of shares in the S&P 500 Index (SPX), are both near 22-year highs. Higher stock prices means investors will be trading fewer shares.

  • With the help of Schaeffer's QA whiz, Rocky White, Ryan ran a study to look at the average total-dollar volume of today's market versus the past. Well, the results were pretty eye opening. Total-dollar volume is indeed lower than during the peak of the financial crisis. However, it's also still well above the bull market from 2003 to 2007. If total-dollar volume is higher now than the last bull market, how in the world can bears say lower volume is bearish?
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