Volume Review
In a Dow Theory Q&A piece dated April 8, 2013, we said the following of stock market trading volume:
“The lack of trading volume in the stock market since 2009 reflects little or no participation on the part of the public. If this is true, then any meaningful rise in trading volume (on the buying side) due to added participation from the public could result in tremendous gains. This thought sits in the back of our mind as we strategize the best way to take advantage while not being over exposed.”
The story on trading volume is somewhat murky, sometimes it matters and sometimes it doesn’t. Learning to discern the two can be frustrating. However, it is hoped that our work on the topic will help provide proper perspective.
Taking a step back, our prior work in trading volume should be reviewed critically. Below are key articles that touch on the topic with the March 13, 2013 piece being, in our view, the most important real-time article on the subject:
Taking the Plunge
What is the best way to describe how trading volume has changed in the last eight years? We would equate trading volume to the preparatory stages of what would be considered a successful competitive dive into a swimming pool. There are three stages to a successful dive: 1) touchdown 2) maximum depression 3) takeoff.
In the stock market, the “touchdown” in trading volume occurred in late September 2009 as the Dow Jones Industrial Average was in the recovery stage of largest stock market decline since the 1973 fall of –45%. The “maximum depression” stage of trading volume lasted from the period of late September 2009 to mid-September 2014. In terms of “liftoff” in trading volume, nothing has rivaled the amount of change that has occurred from mid-September 2014 to the present.
On One Hand…
From all appearances, the stage is set for takeoff from a volume standpoint. And yet, the stock market, as represented by the Dow Jones Industrial Average, since the 2009 low is already ranked seventh on the list of recoveries from prior crashes since 1835. Can the market achieve the vaunted heights of 10 times the prior low as was the case in 1942 to 1966 or 1982 to 1997? Considering that the period of the interest rate cycle corresponds to the 1942 period, we think there is a distinct possibility that “takeoff” is a possibility.
…On the Other Hand
As this has been the most hated bull market in history, which has seen it rise from 6,547 to as high as 21,115, or +223%, there are some elements that are cause for concern. First, fulfilling the above three stages to takeoff are ultimately for successful dives. Is the stock market setting up for a dramatic and steep dive? Why would the stock market rise increase for 8 years on declining volume and suddenly spike on volume 3 times the 90-day average (No, it is not because of the Fed) in the last 4 months?
(Not So) Final Analysis
What would eliminate our questions about the nature of the current “liftoff” stage of volume? Well, we would have preferred a continuation of the stealth increase in volume that began in August 2014. A stealth volume increases is far better because it would have continued the level of suspicion of the market increase. Instead, parabolic increases fall into the category of pending and inexorable declines of large magnitude, after years of market gains.
How does an investor cope with the mixed signals of the market? We believe that a concentration of assets is in order. Pare down the non-staple holdings, focus on income and accept downside risk (we’re thinking semis, insurance and dollar stores).