Volume worries? Put them to rest

by Michael Tarsala

There are far more important things to worry about than low market volumes.

The relatively low amount of trading in recent months has some investors in a tizzy. The concern is that a low-volume rally — like the kind we’ve seen since early June — doesn’t have all that much staying power.

On the other hand, a lot more stock is put into market moves that are confirmed with a lot of volume. It’s a signal that large institutions are participating in the buying.

Source: Stockcharts.com

I’ve already suggested that the low volume says more about a lack of nimbleness at large funds to participate in the summer rally than it does about the quality or staying power of the move.

Allow my former colleauge Mark Hulbert at MarketWatch to truly put the volume worry to rest. From his latest column:

Consider what I found upon analyzing average daily NYSE trading volume for each month over the last several decades. August’s is almost always the lowest of the year.

Indeed, at the 95% confidence level that statisticians often use to conclude that a pattern is genuine, the correlation between August and low trading volume is one of the highest you’ll ever see in the otherwise chaotic world of Wall Street.

In other words, we’re now in the dog days of summer — something that comes around pretty much every year.

For those who may note from the chart that summer volumes were higher last year, remember that there were fundamental reasons why that was the case. Investors 12 months ago were dealing with the downgrade of the U.S. sovereign debt rating, and there was a summer swoon that followed a topping pattern through the first half of the year.

This year, it’s pretty much back to normal.

If you’d like to talk about how volumes, volatility, and upcoming events including the presidential election may affect your investments, we invite you to give us a call. At Covestor, we can help you find strategies tailored to your goals and even help you find investment models that have beaten the market with less volatility than the S&P 500.

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