ANNANDALE, Va. (MarketWatch) — The many advisers who are worried about the market’s low trading volume remind me of cowboys patrolling their camps at night: They worry that, when it gets too quiet, trouble must be brewing.
And it indeed has been growing increasingly quiet of late: NYSE average daily volume during November, for example, was lower than it was in October. And October’s average daily volume was, in turn, lower than it was in September.
In fact, NYSE average daily volume in November was 20% below its average for the entire rally from the March 9 low through the end of October.
Period NYSE daily average volume
November 1.11 billion
November through 11/20 1.16 billion
October 1.31 billion
September 1.36 billion
Mar. 9 through Oct. 31 1.39 billion
Note carefully, furthermore, that November’s low volume wasn’t caused by traders taking the Thanksgiving week off. Average daily volume was low even for the period through Nov. 20, the Friday before Thanksgiving.
Is this trend of lower and lower volume a source of concern? Is it becoming dangerously quiet out there?
“Yes” is the answer from many of the advisers I monitor, on the oft-quoted technical theory that “price follows volume.”
Not everyone agrees, however. In a communication sent to clients earlier this week, Ned Davis, president of Ned Davis Research, argued that, while the trend towards lower volume is something that deserves close attention, it is not yet a reason to give up on the rally.
For example, Davis pointed out, it is entirely normal for volume to back off during the earliest stages of a new bull market, since during the panic selling that typically takes place at a bear market bottom, there usually is extraordinarily high volume.
This was certainly the case for the stock market at the March 9 lows, by the way. Average daily trading volume over the week leading up to the low, for example, was 1.77 billion — 30% more than the average daily volume since then.
To be sure, lower volume becomes increasingly a source of concern as the length of time since the bottom grows. Even so, Davis argues, it doesn’t have to be bearish — provided that most of the volume that does remain is concentrated in stocks that are rising. And that has been the case throughout this rally.
Are there are flies in the ointment? Of course; there always are.
One, according to Davis: Demand for stocks, as evidenced by advancing volume, peaked two months ago — suggesting a “tiring uptrend.”
The bottom line? The technical picture would improve if the trend of trading volume were to reverse and start rising again — and especially so if it is concentrated in advancing stocks.
But recent volumes trends, in and of themselves, do not appear to have immediately doomed the rally.