Saturday, January 19, 2008

Stock Market Volume Increasing to the Downside



Here, immediately above, we see the ETF for the S&P 500 Index (SPY) plotted with its daily trading volume from 2007 to present.

We can see a few things from the chart:

1) Volume Rising on Declines - We can see a pattern of rising volume at intermediate-term market lows;

2) Current Volume Rising - We can see volume rising during this most recent decline;

3) No Capitulation - While rising, current volume is not at levels seen during the August decline;

4) Broken Support - The S&P 500 Index, like its smaller-cap counterparts, is now trading below the lows made for 2007.

The top chart comes from Decision Point and plots the Advance-Decline Line for the S&P 500 Index over the last three years (blue line). You can see we've broken well below the August lows, as weakness has caught up to the large caps.

Note, however, the Advance-Decline Volume Line (green line, top chart) for the S&P 500 Index. This adds and subtracts volume rather than number of issues traded. Here we see that the line is approaching multi-year lows (and support). What that tells us is that we're seeing a consistent pattern of increasing volume on declines ever since July, 2007.

As I've stressed in the past, volume is largely dictated by financial institutions, not small traders. It is sobering that the institutions closest to the current turmoil in credit markets and housing (banks, hedge funds) are voting with their feet and heading for the exits.

RELEVANT POSTS:

* Price-Volume Correlations

* Intraday Volume Analysis
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6 comments:

J said...

"It is sobering that the institutions closest to the current turmoil in credit markets and housing (banks, hedge funds) are voting with their feet and heading for the exits."

Maybe, but bear in mind insider (directors etc.) buying of their own compan's stock when it has been punished is often followed by more downside.
Those who theoretically know about their business the most choose to buy; those who theoretically know less (the market) choose to continue selling. It's herdlike behaviour; what we (well, I) will probably never know is, who is at the front of the herd, dictating the direction? I have heard it said by a trader on Bloomers (not that that lends it any credence) that there are just a handful of big accounts that move the market. Is that true?

bruce said...

"It is sobering that the institutions closest to the current turmoil in credit markets and housing (banks, hedge funds) are voting with their feet and heading for the exits."

They may not have a choice in the matter. Know what I mean?

Anatrader said...

Brett

With reference to 'a handful of big accounts that move the market', going by Smart Money Confidence of 60% for buy and 40% for sell signals,(per Sentimentrader) one can look at it that the Smart Money is the handful of big accounts that move the market, I reckon.

Will Rahal said...

I follow a 5-day momentum indicator that is in "buy mode" and a 10-day ADV/DEC Volume in dicator. Both are showing positive divergence wrt the S&P-500.
I have been bearish, but believe that tuesday is a great entry point for a ST bounce.
See
"Short Term Bottom for Jan 22, 2008"
www.wrahal.blogspot.com

Brett Steenbarger, Ph.D. said...

Hi J,

I don't know if a handful of accounts move the markets, but my research has shown that the 5% of largest trades account for about 50% of all volume. When volume is skewed to one side or another, it is because of those 5% of trades.

Brett

J said...

Hi Brett, thanks for that. IIRC it was Jack Bouroudjian who made the original comment.