S&P 500 Trading Volumes Decline
Back in April William Hester at Hussman Funds penned this article on how trading volume separates bull markets from bear rallies.
Volume tends to expand in the main direction of the trend. In a bull market, advances accompanied by increasing volume or declines on diminishing volume are taken to be bullish. Conversely, in a bear market, declines are accompanied by increasing volume and advances show diminishing volume. Volume should always be studied as a trend (relative to what has preceded). - Richard Russell, The Dow Theory Today
Whether it was William Peter Hamilton observing the trading activity of the 19th century, or Richard Russell who has studied the market’s real-time price and volume action for more than 50 years, or Russell Napier who took the time for an in-depth review of the 4 greatest buying opportunities in the 20th century, each came to a similar conclusion: to confirm a change in market conditions, watch trading volume closely. By this measure, the market’s recent rally still has much to prove.
As the following chart shows volume has started to fall back.
In his latest weekly market comment Hussman states, “As usual, we base our positions not on our expectation of where the market is headed in any particular instance, but on the return/risk profile that the market has demonstrated, on average, in similar conditions of valuation and market action (though we don’t ignore relevant economic facts of course). … Last week, we abandoned the last of our index call options on strength, and are now back to a fully hedged position.”
I share these observations as I’ve noticed a huge upswing in people predicting the start of the next great bull market. Are the new bull market predictors right or does the decline in S&P500 trading volumes foretell another leg down in the market? While that remains to be seen the trading declines are another sign that the market may not have bottomed.
I generally do not employ technical analysis oscillators in my investing. However, I noticed Hester’s article was saved in a folder called RSI, so I thought I’d take a look at the S&P 500′s RSI. To my untrained eye it appears there is a divergence in the RSI and price trend. The RSI (14) peaked on May 6 at 68.63 with the S&P500 at 919, while yesterday they sat at 60.96 and 939 respectively. (Probably meaningless and certainly not something to hang your hat on.)
On the upside the S&P 500 is now trading above it’s 200 DMA, which as I commented back here. Plus down here in Australia politicians and newspapers managed to find one set of seasonally adjusted figures to “prove” we avoided a recession.
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