Pump up the volume
Prices were moving in the right direction this week, but the
moderate trading volume meant that the market was still
uncommitted
By Leon Lazaroff
moneydaily.com
Commentators were juiced on Friday as the market closed up 59.99,
capping a week of gains marked by strong performances in the
banking, oil and technology sectors.
But while it is always great to see the market rising, the past
week's gains were accompanied by moderate trading volume, or 686
million Friday on the NYSE. And in the current market, 686 million
means a lack of commitment, a market that is said to be trading
sideways.
Not that long ago, of course, a 700 million-share day on the NYSE
would have represented a stunning level of activity. Just two
years ago, average daily volume in October was 422 million shares.
Today, that level would be a sign of a severe crisis in investor
confidence.
Nowadays, the market has to top 800 million shares for trading to
be called heavy. Starting in late summer, Wall Street went through
a heavy trading period for nearly three months in a row, when
average daily volume went from 719 million in August to 796
million in September and 824 million in October.
Explosive volume set a new all-time record on September 1. The
combination of Russia's worsening economic problems and mounting
concerns about corporate earnings sent trading volume on the NYSE
to an astronomical 1.2 billion shares, the heaviest Big Board
trading ever. "Heavy volatility meant heavy trading," said Robert
Dickey, technical analyst at Dain Rauscher.
When volume slipped back to 700 million and below in early
November, some market commentators overreacted, lamenting that
trading was light. "Hey, those aren't shabby numbers," notes Scott
Appleby of ABN-AMRO. He has been following trading volume for two
decades.
Other analysts consulted by Money Online agree: in this market,
700 million is a steady buzz with no discernable direction.
Trading volume has steadily grown as legions of new investors have
entered the market, buying and selling a far larger number of
stocks, up from 7,000 in 1994 to more than 9,000 today. Dickey
notes that 7,000 mutual funds are now trading. In fact, trading
volumes have increased every year since 1975 save for two: 1988,
the year following the crash, and 1990, a recession year.
The explosion in trading is mostly the result of the bull market
that began in the wake of the 1987 market crash. As the market
strengthened, mutual funds proliferated and discount brokerage
services sprouted like rabbits.
The sheer numbers of investors and choices has driven volume from
a daily trading average of 203.1 million shares in October, 1992
-- a level that today would be comatose -- to the present levels
of 700 million and up.
In addition, new and smaller investors found trading easily
accessible through a variety of new Internet trading services.
Getting in on the market's surge was easier than ever. Moreover,
the lower costs available to small investors who use Web services
such as Etrade, Schwab and Datek has added to market volume.
Concurrently, each market rise has been accompanied by further
trading as investors expanded or switched funds, or played around
with their 401K plans. "A lot more people own stocks than ever
before," added Dickey. "As the market has risen, you can't help
but expect that volume will go up as well."
As a result, Richard Dickson, a technical analyst at Scott &
Stringfellow, says volumes now must top more than 800 million
shares before being considered heavy. Only when volumes are lower
than 600 million shares would trading be deemed notably light. The
benchmark for the moment is the 700 million range we are seeing
currently.
So what does this level of trading tell us? Dickey calls it a
"breathing cycle," when buyers and sellers reach an equilibrium as
they wait for the next big event or indicator to tell them
something significant. "Volume supports whatever trend is in
place," Dickey added. "Right now, that trend isn't clear. Low
volume doesn't tell you much, just that people don't want to
commit."
Volume expert Appleby agrees: "The thing to keep in mind is that
the market has these gyrations," he notes. "The trend is certainly
for more volume. It's retail driven and hedge fund driven."
So for now, if you see a day like Friday when everything looked
good but the volume was below 700 million, enjoy your weekend. But
if you see a day when volume is spiking significantly higher,
somewhere above 800 million, that is when your adrenaline should
spike a little higher, because that is when you will be seeing the
market making a decision.
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