3/17/2010

Volume Control

A good column on volume today from Michael Kahn — go check it out, and then read the ‘addendum’ on his blog:

I must caution investors that volume does indeed still matter. And when volume does start to increase, it might be a sign of a turn in the market and not the signal that it is time to buy.

The bible of technical analysis, Edwards and Magee’s Technical Analysis of Stock Trends, says this, “Volume is of the utmost importance in all technical phenomena.” Although price action is the most critical of factors in charting, volume tells us the conviction of the marketplace.

—

But is a lack of conviction really a bad thing? Should it matter how the market goes up if we are watching our portfolios grow?

The lack of participation by many different types of investors means that stocks are in the hands of fewer owners. There is no buffer against adverse news, and it would not take much to get that group crowding the exit doors.

A buffer, in the form of a relative balance of buyers and sellers with different time frames and risk tolerances, slows down reactions. In a well-diversified marketplace, a small selling event does not turn into a stampede.

—

Look upon volume as a risk measure and not a trend measure. The more volume, the more widespread the bullish mood and the more orderly the market will be, both as it rises and as it turns. Low volume does not prevent rallies. It does make them riskier.

Posted: 7:26 pm

1 Comment »

  1. And while we’re on the subject of volume, there’s this from Scott Bleier:

    In what’s become a familiar pattern, the rally is occurring on low volume and without any of the drama investors have become accustomed to in the past two years. That’s good news but it’s also a sign of what Scott Bleier, president of CreateCapital.com, calls a “zombie market,” where the vast majority of trading volume is computer driven and occurs at the open and during the last 10 minutes of the session.

    Bleier’s theory — which definitely has some “conspiracy” elements — is that policymakers at the highest levels of government have come to the realization that “it’s the capital market tail that wags the economy’s dog.”

    Comment by BMB — 3/17/2010 @ 7:53 pm

RSS feed for comments on this post.

Leave a comment

Line and paragraph breaks automatic, e-mail address never displayed, HTML allowed: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

  (Not required, not displayed)