Low market volume may not be such a big problem after all

by Michael Tarsala

Conventional wisdom holds that a market rally with a low volume of shares transacted lacks an important confirmation of the rally’s staying power. But it turns out that low market volume may say less about the quality of rallies and more about the disadvantage of very large investment funds that have lost their nimbleness.

Source: Bespoke Investments

The chart above from Bespoke is confirming that many of the stock market’s big gains are coming amid light volumes — days where very large funds will have a hard time moving in and out of the markets. In blue is the percentage gain for the S&P 500. It’s up 108% since the March 2009 lows. In red is the S&P’s performance only on days when volume is above average; it’s down 30.1% over that same time period.

Low volumes tend to make it harder for large mutual funds and hedge funds to be nimble. It may may be more difficult for them to establish stock positions. They need to wait until a big enough block of shares becomes available, or build up positions by buying many blocks again and again.

Perhaps more importantly, low volumes may mean that selling at a top or ahead of potential trouble may take longer for the very large funds — possibly to the detriment of investors.

On the other hand, smaller account sizes may make it easier for investment managers to be opportunistic and to find better pricing — especially during the low-volume rallies.

At Covestor, small size is one of the advantages that we offer to our investors.

Another is the peace of mind of knowing your money is separate from everyone else’s money. It’s in a brokerage account in your name, not sloshing around in a big pool account run by us or some third party, and there is no one earning interest on it.

If you would like to find out more about why Covestor is different and how we may be able to help you meet your investment goals, call us at 866-825-3005, X 703.