Breakout

Are Low Volumes Really Bearish?

Jeff Macke
Breakout

According to WSJ market data, average turnover this month has been just 4.8 billion shares daily. The volume is a far cry from 8 billion and nearly 6 billion shares a day in August 2011 and 2010 respectively. Another WSJ article this morning suggests the low volumes are causing investors to question the sustainability of the rally that's taken stocks over 8% higher since early June.

Lee Munson, author of Rigged Money and founder of Portfolio LLC takes the other side of the argument. Volume matters, but the way it's measured hasn't changed to reflect modern markets. "There's a reason for us as investors to change the way we look at and analyze volume," he says.

Munson says the old metrics are obsolete due in large part to changes in the investment vehicles offered and trading techniques. As Munson sees it, the most ready example is the impact of ETFs. With the ability to buy or sell an entire sector with one ticker, Munson says fund managers are apt to trade in larger chunks, rather than churning different companies within a space.

In theory, buying or selling an ETF would translate into corresponding activity in the underlying stocks. In reality, arbitrage and other back-office maneuvers reduce the volume recorded by ETF trades.

It's easy to start going a little Inception on this stuff and start questioning if anything you see is what it appears to be. For example since money is flowing from bonds to stocks, should volume expectations be reduced accordingly or are they part of the same measure? Does buy and hold, a bullish stance, paradoxically make volume levels look bearish? In the age or electronic trading does any of this talk even matter?

The possibilities are endless. The bottom line is that price is the arbiter of market direction. Everything else is just a way to inform a guess as to the next move. Low volume is reason to doubt the strength of the rally, but you buy bread with realized gains, not doubts or durability.

The S&P 500 is more than 12% higher year-to-date. Volumes are low but that's not going to affect whether or not individuals buy or sell equities at the quoted price. Unless you're throwing around Buffett-level money, there's ample liquidity to buy or sell your entire portfolio. Practically speaking that's all individuals need.

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