Pump Up The Volume

Traders and technical analysts typically pay close attention to volume statistics. In and of itself, volume does not offer much insight into a trading or investment decision. Volume is best viewed on a relative basis. If I tell you that a stock traded 10 million shares yesterday, that number on its own is essentially meaningless. It completely lacks context. If I tell you that the average daily volume in that stock is 2 million shares, it would be normal for you to wonder why yesterday’s volume was 5X normal. If it normally trades 10 million shares a day, you would probably be unimpressed. Traders typically look to see whether a large move in a stock is accompanied by heavy or light volume, “heavy” and “light” can only be judged in comparison to the stock’s prior volume history. 

A classic investment truism is the larger the volume, the more meaningful the price movement. Higher volume reflects higher conviction by the buyers or sellers who are driving the price action, while moves on lighter volume tend to be perceived as more likely to be transitory. One of the hallmarks of the stock market’s rise off its pandemic lows was a spectacular increase in volume. Investors of all types were participating in the advance, and much was written in the media about the new wave of individual investors who began participating in investment markets. The consensus view, which I share, was that the rise that we saw during the past 12 months was largely a high conviction move, as evidenced by stellar volume statistics.

With that in mind, consider the following chart:

S&P 500 Index (SPX, blue) vs 20 Day Moving Average of Total US Share Volume (magenta), 5 years

S&P 500 Index (SPX, blue) vs 20 Day Moving Average of Total US Share Volume (magenta), 5 years

Source: Bloomberg

In the chart above, I chose to use the 20-day moving average of US share volume to smooth out the noise in the daily statistics. (There are about 20 trading days in a calendar month)We see that there were volume spikes around the various declines in SPX, but that the pandemic drop in early 2020 resulted in volumes that were more than double the norms of the prior four years. Even as the volume spike passed, volume levels never fully reverted to those historic norms. We have become quite used to higher trading volumes. Interestingly, the volume spiked earlier this year on a rally though. The following chart shows this in more detail:

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Disclosure: The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the ...

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