Watching Trading Volume Fade Out

by: Barry Ritholtz

A few weeks ago, someone responded to a discussion about economic slowing with the following comment: "Price and Volume tell all."

Fair enough: "What has VOLUME been telling you over the past few weeks?" I asked. Given the run off of the March lows has come on decreasing volume, it's an important question.

Barron's resident technician, Michael Kahn, picked up on the same idea in a recent analysis:

THE STOCK MARKET HAS PUT on a nice show with the Dow Jones Industrial Average rising some 5.5% off its March 14 intraday low. Along the way, it has ignored several technical barriers and even saw one major index, the New York Stock Exchange composite, set a new closing high.

But from the start of the rally through this week's action, trading volume has been conspicuous by its absence. Without volume, the market will soon run out of fuel, and under such conditions we cannot expect it to run much longer.


We have noted a similar issue with overall market volumes. Even worse than low volume is the increasing volume during selloffs, and decreasing volume during rallies. This suggests to me that we are now transitioning from a period of accumulation (institutional buying) to a period of distribution (broader selling).

It's not limited to the NYSE or S&P. Trading on diminishing volume is seen on many popular ETFs, including Dow Industrials (NYSEARCA:DIA), Nasdaq 100 (QQQQ) and other commonly traded ETFs. Kahn notes that "exchange-traded funds such as those covering the Dow, S&P 500, Nasdaq-100 and Russell 2000 all show the same volume declines, and this confirms that this condition is truly marketwide."

Of course, volume can pick up at anytime and that would change this analysis. However, we can only analyze what is actually on the charts now and draw our conclusions from the evidence presented.

With most major indexes well below their February peaks, which are respective resistance levels, and volume drying up at a steady pace, the conclusion has to be that the stock market is now running on empty.

That's a fair warning. We will be watching volume activity closely over the next few days and weeks to see how this develops further . . .

Stock Market Is Running on Empty
Michael Kahn
Barron's April 11, 2007