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Conclusion: Closed end funds’ (CEFs) stock volume trading patterns may indicate that the CEF market segment may be heading towards a period of moderately sustained price appreciation.

Volume Counts: Price and volume are two basic building blocks of technical analysis. Non-technical investors have a tendency to focus mostly on price changes and give share volume short shrift. This article reviews the volume characteristics of the CEF market segment for any clues with respect to its price direction.

CEF Volume: The chart below compares the volume and price index of the Eqcome CEFBig10 (CEFBig10). The CEFBig10 is a CEF index constructed in a similar fashion to that employed by S&P’s Investment Committee in constructing the S&P indices. It provides investors a diversified participation in the CEF market sector. (See report: A Poor Man’s CEF Portfolio that Performs (5/27/09).)

The chart demonstrates the unweighted average CEFBig10 Price Index compared to the 5 day moving average of the total volume plotted inversely. What the chart illustrates is a tendency for CEF volume to increase during periods of CEFs share price declines; the volume tends to recede during periods of CEF share price appreciation. This was particularly evident during period of Sep ’06 to Oct ’08 (rectangle “A”).

During the subsequent time period (Nov ’08 to Mar ’09) share volume became highly volatile (rectangle “B”). This was a period of great investor confusion; the markets were in a process of seeking their bottoms. CEF investors were whipsawed during this period as the CEF market segment was making, what appeared to be, a double bottom.

This latter period (rectangle “B”) has been followed by a period of reduced volume volatility and a rise in CEF prices. While there is always a possibility of a further CEF price downturn, it would seem investors may be heading into a period of relative stability with the potential for further advances in CEF share prices.

CEFs Vs SPY Volumes: As investors would expect, the volume volatility of the CEF market segment would be less than that of the equity market in general. This would be due to the income (yield) nature of the investment, its diverse fund types—which include fixed income, its heavily retail oriented investor base and its limited liquidity.

The following chart illustrates the 5 day moving average of the CEFBig10 versus that of the S&P 500, as measured by the SPDRs S&P 500 ETF (NYSEARCA:SPY). As demonstrated, there appears to be a relationship between the two; (R^2=.45).

CEFs Volume Volatile Less: The CEF market segment’s share volume is less volatile than the equity market as measured by SPY. The CEF spread between its high and low daily volume percentage changes was approximately 25% less than SPY from Sep ’06 to Mar ’09. This was also true of their respective standard deviations of daily volume changes.

During the period from Sep ’06 to Mar ‘09, the SPY experienced 69 daily volume percentage changes from the previous trading day of plus-or-minus 15%. This is compared to 40 for the CEFBig10 over the same period. During the market’s bottoming process (Nov ’08 to Mar ’09) SPY experienced 7 daily volume percentage spikes while the CEFs experienced 4.

Disclosure: I own all the stocks in the CEFBig10 Portfolio: ADX, CSQ, CHY, ETG, EVV, PPR, PHK, AWF, NUV, EQI.

Source: CEF Volume Trends May Portend Their Appreciation