I recently posted on my use of momentum, strength, and sentiment data to assess whether markets are gaining or losing directional tendency. If there's a fourth leg to the table, it would be volume. In particular, I have been impressed by the relative dollar volume flow data and their ability to distinguish strong from weak markets. My recent post found that dollar volume flows into the Dow 30 industrial issues have been positive, although reduced from the strong levels of late 2006.
I'm reading a fair amount of bearish buzz on bulletin boards/forums and also hearing from bearishly inclined readers of the blog. While the sentiment is not quite as emo as after the late February drop, it does give me pause. What has me even more skeptical of the near-term bear case are those dollar volume flow data. The market corrections we've seen of late have been preceded by sustained periods of below-average dollar volume flows among the Dow stocks. We're not seeing that at present. Indeed, out of the last 20 trading sessions, fully 14 have seen above average dollar volume flows (i.e., daily flows greater than the 200 day average).
Let's take a look at the recent historical data. As of Friday, we're up over 3% on the Dow over the past 20 trading sessions. Going back to the start of 2005 (N = 553 trading days), we've had 74 occasions in which the Dow has been up more than 3% over a 20-day period. Ten days later, the Dow has averaged a gain of only -.02% (39 up, 38 down). By comparison, the average ten-day gain in the Dow over the entire sample period has been .29% (343 up, 210 down).
When we divide the strong Dow periods by dollar volume flows, however, a distinct pattern emerges. When the Dow has risen by more than 3% over twenty days and we've had solidly above average dollar volume flows, as we've had recently (N = 37), the next ten days in the Dow have averaged an impressive *gain* of .49% (27 up, 10 down). When the Dow has been similarly strong but we've had relatively weak dollar volume flows (N = 37), the next ten days have averaged a loss of -.53% (12 up, 25 down).
In short, rising markets with strong money flows have tended to continue their ascent. Rising markets with weak flows have tended to reverse. I will be investigating this pattern with other averages and over other time periods. For now, for me, it's a fly in the bear's ointment. Going forward, I'll update relative dollar volume flows for the Dow stocks in the Trading Psychology Weblog.
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6 comments:
Interesting series of posts. Your Friday post had a cautious or slightly pessimistic bent to it. This post is a bit more bullish. Clearly, you've been researching your data base and rethinking or re-analyzing what it tells you. That alone speaks to your analytical nature.
Now, the obvious question is: Do the Dollar volume flows ever just "stop on a dime"? Looking back at Feb 27, we had a similar strong run-up on strong volume (as judged by the Chaikin Money Flow) right up to Feb 27. Admittedly, the market looked "tired" with three lower closes (but not by much) on Feb 22-23 (Options Expiration Week) and on Feb 26.
Also, there was an external event (Shanghai sell-off) that triggered it. However, you could argue that this was one instance where strength did not beget more strength. The more I see events like this, the more I appreciate the "random walk" hypothesis!
To sum it all up, my concern now is not bearish; but it's not particularly bullish, either. I see a similar run-up on the CMF but declining daily volume heading into options espiration. This is a time where the Large Traders can really jack things around to try to protect their positions. So, when you look at your data, does it take Options Expiration Week into account? I suspect that Options Expiration Week will be slightly different. But I'll wait for your further analysis to tell me if my suspicions are correct.
And thanks for your excellent work!
Hi Bruce,
Great points. One reason I think the Feb-early March decline was *not* protracted was that it was not preceded by significant volume flow weakness. (Unlike, say, the May-June, 2006 decline). It's clear, however, that--leading up to the decline--flows had tailed off and the other indicators were showing divergences. Viewing the indicators in a unified perspective is important.
I need to see further weakening among the indicators--including the dollar volume flows--to anticipate a protracted decline. I don't have any particular data on options expiration that affect this outlook one way or another. Thanks for the note--
Brett
“Those who do not learn from history are doomed to repeat it” George Santayana
The problem is that History provides us with so many lessons and examples that one can find a plausible exemplar for any belief or course of action. I've had fun discussing the market with you (and I hope that you have, also). My belief, going into this week was that the market would try to inflict the most pain on the most people as possible. I find it interesting that as soon as the DJIA made a new high, the market promptly began selling off.
I don't know if we're seeing distribution; but we're certainly consolidating. Now, looking at my charts, SPY has a gap and a trading range from 143 to 145. Vix is in a range from 11-12% up to ~20%. What do you think the Market Makers are going to do? My supposition is that they will try to move the market back down into its previous range and jack the Vix up close to 20%. In the process, people will be shaken out of their calls and induced to buy puts at inflated valuations. Then, after options expiration, they'll start buying the market and dropping the vix (creating a volatility implosion). Once again, "the market" will have created the most pain for the most people.
I admit that this is somewhat paranoid thinking. (I'm not really that way and I HATE conspiracy buffs). I just like to do this as a contrarian intellectual exercise to try to mentally prepare myself for the unexpected. I also admit that I am looking at past market behavior and extrapolating. And, of course, "past performance is no guarantee of future performance".
By the way, I really find your blog to be very stimulating. It's made me think of many different things or of familiar things in a whole new light. Thanks!
Hi Bruce,
Thanks for your note. I do, indeed, find it helpful to be prepared for the unexpected. Because of those short-term reversal patterns in the market (retracements when moves to new highs/lows don't expand the number of stocks making new highs or lows), there is indeed a sense in which the market inflicts short term pain on participants!
Brett
Hi Brett,
This being my first post here I hope I don't tread on toes...but I'm not seeing anything remotely positive about the cumulative volume, even with this bounce.
Now, I know that the recent lowering of margin collateral requirements may buoy the rah rah crowd in the short term...but I don't see it reversing the massive outflows coming upon us as the boomers become a net drain on the funds. If you take a five year view of the $dji weekly, we are still entrenched in heavy outflow territory and the down channel held even with this bounce(so far).
Given your experience...does the convergence of massive money supply increase, lower margin requirements and higher highs not lean one towards a blow off top argument @ 127% of 00/01 market highs?
Very much interested in your take and thanks much for your input and time.
John
Hi Desi,
At present we're seeing expanding highs and dollar volume flows. Historically, that situation has tended to lead to higher prices ahead. It's when we see fewer stocks participating in strength, as was the case in 2000, that we tend to get reversals.
Brett
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