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Volume a Go-Go


I KNEW there was something special happening!


I don't like volume as an indicator.

That's heresay to many technicians, but in all the studies I've done over the years, I haven't found many ways of looking at traditional market-wide volume statistics that presented an edge.

There are certain times where that changes, however. Like now.

In his 1986 book, Winning on Wall Street, Martin Zweig outlined the implications of seeing multiple days where volume on the NYSE was skewed by more than 9-to-1 in favor of stocks that closed up on the day (meaning that for every 100 shares traded, 90 of them were in stocks that closed higher than the previous day, and 10 were in stocks that closed lower than the previous day).

Over the past three weeks, we've seen two of these days. Mr. Zweig went over a few different scenarios with combinations of days, but what I wanted to see was what happened any time we got two of these days within one month of each other, with no intervening 9-to-1 down volume days that might dampen the signal.

Over the past 40 years, I show that this has happened on nine other occasions. While it was not necessarily an immediately effective buy signal (a couple of times equities dipped another several percent over the next month), it did tend to precede overall positive market environments.

For example, if we look at the returns in the S&P 500 three months later, the average return across the nine instances was +9.4% with eight of the nine being positive. Six months later, the return climbed to +16.5% with all nine positive.

Both of those average returns are about four times a random three- or six-month return during the past four decades.

One could argue that it is easier for us to see skewed volume figures since the NYSE went to decimalization, and that since bonds made a relatively large move yesterday, that was also an influence. Both of those points have some validity to them, however I don't think either one erases the extremely unusual events that have occurred.

And if history is a guide, then the rush of positive volume we've seen suggests that the bull market could still be alive and (mostly) well.

No positions in stocks mentioned.

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