Pump Up The Volume

S&P 500 Index (SPX, blue) vs 20 Day Moving Average of Total US Share Volume (magenta), 6 months

S&P 500 Index (SPX, blue) vs 20 Day Moving Average of Total US Share Volume (magenta), 6 months

It turns out that the highs in volume roughly coincided with the height of the craze that surrounded GameStop (GME) and other “meme stocks”.In hindsight, the volume wave was not surprising, though it was somewhat unusual to see a volume pop in a generally rising market.

What then are we to make of the fact that the latest leg up in SPX is being done on decreasing volume? If technicians want to see market moves confirmed by higher volume, meaning higher conviction by buyers, then there is some risk to seeing an upward move on lighter volume. This would not be considered a red flag to most analysts, but it is not a positive sign either.

We see a similar pattern in options markets, as evidenced by the following graph:

Total US Call Options Volume (green), Put Volume (white), and Put/Call Ratio (red), 2 years

(Click on image to enlarge)

Total US Call Options Volume (green), Put Volume (white), and Put/Call Ratio (red), 2 years

As we saw with stocks, options volumes rose throughout most of 2020, peaking in late January of this year. Much of the rise was seen in short-dated, out-of-the-money call options that are purchased primarily by speculators. In contrast, we see that put options volumes have stayed largely in the range that we saw throughout the 2 year period. As call volumes fell in the past 2 months, we saw a brief spike in the put/call ratio, but that index has reverted to the low levels that have characterized the past 6 months. Again, we need to consider the ramifications of the decline in call options volume for the recent rally. It is not necessarily a negative if speculative fever is diminishing, but we need to consider whether those speculators are required for the current advance to continue.

 If the current volume trends continue, we will need to address the question about the sustainability of the rally and the conviction of the investors who are driving prices higher. Volume trends are rarely a pure signal, but they can provide important confirmation to the moves in a given stock or index and can offer a clue about whether those moves are sustainable. Stay tuned.

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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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