Tuesday, April 22, 2008

Is Buying Drying Up?

When looking at the market statistics today, the one thing that really stood out was the complete lack of volume. The exchange market volume was nearly the lowest of the year. The SPY and QQQQ volume WAS the lowest of the year.

Back in March I busted the old “light volume pullback after a short-term runup signals a healthy consolidation” myth. Today I’ll look at it a little bit differently.

Only 2 conditions – 1) Today’s volume is the lightest in at least 20 days, and 2) the market is trading above its 10-day moving average. I don’t care whether the market is pulling back or not for this test. I only care if we see exceptionally light volume during a short-term uptrend.

Using these conditions I ran tests on both SPY (back to 1994) and QQQQ (back to 1999). Results below:

It appears buying interest is drying up. In the past the market has not fared well under these conditions.

Some may point out that these results differ greatly from the breadth study I showed yesterday. It appears breadth and volume are currently giving opposite indications. Studies that conflict make analysis more difficult. In the Subscriber Letter each night I discuss my take on all the recent studies. In the blog in the near future I will write some detailed thoughts on how I go about doing this.

3 comments:

Woodshedder said...

In your March mythbusting, I'm curious what the results would have been looking out 10-20 days. Obviously, the pullback was a healthy one, after all ;)

My point is that 5 days seems anecdotally to be around the average time span of a pullback. Measuring at the 5th day may have caught the worst of it.

Rob Hanna said...

woodshedder,

For the March study the results turned consistently positive from day 14 on. They continued to underperform a typical time period all the way through 20, though.

The most negative time period was 4 days.

Rob

Woodshedder said...

Thank you.