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Does Low Volume Make This Rally Any Less Real?

Published 08/27/2014, 03:12 AM
Updated 07/09/2023, 06:31 AM

Yesterday marked a year-to-date low in NYSE trading volume despite the S&P 500 Index hitting a new all-time intra-day high above 2,000. Despite the fact that many stocks are seeing fewer buyers and sellers, the markets are continuing to build on this 5-year bull market in earnest.

However, when the gains come at the expense of fewer participants, the bears are quick to point out that this rally can’t last. Whether that is true or not, the reality is the gains are still as meaningful as any other trading day. Billions of dollars change hands even on a low volume session that has the ability to impact millions of market participants.


In fact, aggregate NYSE trading volume has been trending downward over the last several months. Excluding some single-day anomalies of strength, the pervasive trend has been on the decline and stocks don’t seem to care.

Volume is a traditional metric that can help establish the credibility of a move within an individual stock or index. It also provides an indicator of liquidity for buyers and sellers that are exchanging shares in real time. Conventional wisdom is that higher volume indicates the majority of participants believe in the move. Conversely, a low volume move in a stock may indicate a weaker consensus that is viewed with skepticism.

However, at the end of the day, the only thing that really matters is price. Volume certainly doesn’t contribute to the total return in your account other than to aid in efficient executions of trades. Looking at various technical or fundamental technical indicators can help build a case for why you are investing in a specific area of the market, but it won’t tell you the ultimate outcome.

This is because markets aren’t logical, they are psychological. They can climb a wall of worry that defies all sound reason or fall out of bed when everything seems to be in great shape. Knowing why something occurred is rarely profitable. Rather you should focus your energy on closely monitoring your asset allocation, position sizes, stop losses, and other investment areas that are in your control.

I will reiterate that on an individual trade basis, low volume can adversely affect liquidity within specific stocks or ETFs. To overcome that problem, I always recommend using a limit order on thinly traded securities to ensure you are executed at the price that you specify beforehand. If you don’t get filled, you can always move the limit or relish in the knowledge that you avoided being taken advantage of by an opportunistic market maker.

Creating a disciplined investment approach and implementing it decisively will always produce superior results.

Disclosure: FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this article. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.

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