TOTAL EXCHANGE VOLUME AINT WHAT IT USED TO BE -- LOW VOLUME BREAKOUTS ARE NOT ALWAYS DOOMED -- ETF VOLUME CAN BE SUSPECT -- SMH AND OIH VOLUME CHANGED AFTER MANAGER SWITCH -- VOLUME MAY BE BEST SUITED FOR INDIVIDUAL STOCKS
TOTAL EXCHANGE VOLUME AINT WHAT IT USED TO BE... Link for todays video. Volume can be important, but chartists should remember that it is just an indicator that should be considered secondary to price action. First, note that exchange volume aint what it used to be. Back in the day, almost all trading went through the major exchanges and exchange volume provided a good assessment for overall activity. These days, so-called dark pools account for over 10% of stock volume, and this figure is likely growing. Dark pools offer big players the opportunity to buy or sell large blocks of stock at a fixed price without affecting prices on the actual exchange. These are back alley trades do not show up in exchange volume. The following excerpt comes from a recent article in Bloomberg:
Dark pools matched 935 million shares a day, or 13.5 percent of stock changing hands, compared with 1.02 billion, or 12.4 percent, a year earlier, according to data compiled by Rosenblatt Securities Inc. That topped the prior market-share record of 13.2 percent in April. The firm tracks transactions on 18 dark pools, or venues that dont publish bids and offers and are used by fund managers and brokers trying to limit the impact of their trades on prices.
Chartists should also note that hedging practices, high-frequency trading and flash trading are more prevalent today than they were 10 or 20 years ago. In particular, high-frequency trading could be inflating volume figures during volatile periods. Some estimates suggest that half of exchange volume is due to high-frequency trading. Also note that regulators think high-frequency trading exasperated the flash-crash on May 6th, 2010. Chart 1 shows NYSE volume exceeding 10 billion shares on 6-May-10, which was more than twice the 250-day average. High-frequency trading is also partially to blame for the exceptionally high volume levels seen in August 2011. Chart 2 shows Nasdaq volume exceeding 4 billion shares in August, which was also twice the 250-day average.
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Chart 1
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Chart 2
LOW VOLUME BREAKOUTS ARE NOT ALWAYS DOOMED... These high-volume periods make volume in other periods appear low or at least below average. Chart 3 shows the Nasdaq with volume over the last eight months. After high volume in August, September and October, Nasdaq volume settled down in November and December. Notice that the index consolidated or corrected during this period and then broke resistance in early January on lower volume. Volume did not pick up until early February, but the Nasdaq was already some 200 points above its breakout. Waiting for an uptick in volume would have been quite costly.
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Chart 3
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Chart 4
Chart 4 shows the NY Composite breaking resistance in late December and early January, again on low volume. Despite low volume, the breakout held and the index continued above its October high. The moral of the story? Price action matters the most. Volume does not affect a traders P&L. We make or lose the same money, regardless of volume. Price action is the only thing that affects our P&L.
ETF VOLUME CAN BE SUSPECT... Chart 5 shows the S&P 500 ETF (SPY) advancing on below average volume since late December. Yes, pretty much the entire rally from 19-Dec occurred on below average volume. Volume on 20-Dec way slightly above average, but the rest was clearly below average. The breakout in late December and early January was definitely on low volume. Nevertheless, the breakout held and the ETF gained over 12% with low volume.
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Chart 5
Chart 6 shows the Nasdaq 100 ETF (QQQ) also breaking out on low volume in late December and continuing higher with low volume until mid February. Also note that the high volume breakout in mid September did not hold and the ETF returned all the way back to its lows in early October. Volume is not the holy grail here.
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Chart 6
SMH AND OIH VOLUME ADJUSTED AFTER MANAGER SWITCH ... Merrill Lynch got out of the ETF business and transferred some of their HOLDRs to Market Vectors in December. These included the Oil Service HOLDRS (OIH), Semiconductor HOLDRS (SMH), Pharmaceutical HOLDRS (PPH), Biotech HOLDRS (BBH), Retail HOLDRS (RTH) and Regional Bank HOLDRS (RKH). Instead of HOLDRS, these ETFs are now simply referred as Market Vectors. While I do not know the details of the transfer, volume was clearly affected around the time of the switch, which occurred on or around December 20th. Chart 7 shows the Market Vectors Semiconductor ETF (SMH) with trading volumes exceeding 5 million shares daily on a regular basis in October, November and early December. Volume dropped below 5 million on 15-Dec and never fully recovered. I think this has more to do with the switch to Market Vectors than anything else. Chart 8 shows the Market Vectors Market Vectors Oil Service ETF (OIH) with similar characteristics. Chartists should keep these circumstances in mind if using volume to analyze these ETFs.
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Chart 7
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Chart 8
VOLUME MAY BE BEST SUITED FOR INDIVIDUAL STOCKS ... Despite the drawbacks in exchange volume and ETF volume, I do not think volume is a worthless indicator. However, I would be careful not to place too much emphasis on volume. Volume is an indicator just like any other indicator, such as MACD, the Average Directional Index, Aroon, On Balance Volume and moving averages. Sometimes indicators work and sometimes they dont. It is important to focus on the actual price chart first and foremost. Price changes dictate wins and losses for traders. Indicators, volume included, are secondary to the price chart and our bottom line. An upside breakout and uptrend indicate that prices are moving up. Traders should be bullish or on the sidelines, regardless of volume. Similar, a downside break and downtrend point to falling prices. Traders should be bearish or on the sidelines, regardless of volume.
I would hazard an educated guess that volume for individual stocks is more useful than total exchange volume or ETF volume. In addition, I think an increase in volume is more important for bullish price moves than bearish price moves. This means a price breakout on surging volume would be more bullish than a price breakout on low or average volume. Similar, a volume pattern that shows higher volume on up days and lower volume on down days would show signs of accumulation, which could lead to price strength. The opposite would show signs of distribution, which could lead to price weakness.
Chart 9 shows Ciena (CIEN) with a classic volume pattern. The stock surged on high volume, consolidated on low volume and then surged again on high volume. The second surge produced a breakout that foreshadowed a sizable advance. Chart 10 shows Dish Network (DISH) with two consolidation breakouts on expanding volume.
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Chart 9
