Tuesday, May 13, 2008

What The Extremely Low Volume On Monday May Mean

I’m seeing more and more bearish signs. In the Quantifiable Edges Subscriber Letter on Sunday the intermediate-term outlook moved from slightly bullish to slightly bearish. The move was based on recent research, some of which appeared on the blog while some was for subscribers only. Today’s action did nothing to make me feel more bullish.

Let’s take a look at the S&P 500. It rose 1.1% today on the lightest volume since the week between Christmas and New Years. I looked back in history to see how the market performed any time the S&P 500 rose 1% or more on the lightest volume in at least 20 days. Results looking back 30 years below:

As you can see the implications are quite bearish over the next 12 days. One issue when looking at low volume studies, though is holidays. Six of the instances happened on a shortened session near either 4th of July or Thanksgiving. Those were 7/3/1997, 7/3/2000, 11/24/2000, 11/23/2001, 7/5/2002, and 11/23/2007. Two things are notable about these dates: 1) 7/5/2002 was followed by a massive 19% selloff over the next 12 days which skewed the above results negatively. 2) Most of the other holiday instances were followed by rallies which skewed results positively. I re-ran the study excluding these instances. Those results over the last 30 years are listed below:

From a winning percentage standpoint this is quite a bit worse for the bulls. Even eliminating the massive 7/2002 outlier the remaining results have a strong bearish tilt.

For those who would like to read more about the bearish case, check out Bill Luby’s latest chart and some of Dr. Steenbarger’s findings here and here.


Anonymous said...

I am sorry, but the light volume yesterday may also be tracked back to most European Investors being on Holiday.

Don't you think?


Unknown said...

Thanks to the Shark Report, I just linked to this site for the first time. I haven't found many good "quant" blogs/sites until now.



Rob Hanna said...


Good observation and I'm sure that did have some affect. Tough to determine how much, though. Even with Europe on holiday a 1% rise in the S&P should generate some excitement and volume. Perhaps some large US players saw it as an opportunity to inflate prices when they knew the volume could be slightly lower thanks to Europe. In that case, the implication is still bad. The Nasdaq actually posted higher volume than Friday. In all, I'm not sure how much Europe being closed may affect the study's influence, but I don't like the volume pattern anyway.


http://dayshark.blogspot.com/ frequently has some good stuff.


Anonymous said...

if it's the Europeans then we should had seen similar low volume in the past years around this time of the year (depending on how long this holiday being around) otherwise i doubt it's due to the holiday.


Damian said...

Rob did you happen to read the study someone on Bill's blog was suggesting regarding front month VIX contract Standard Deviation from VIX cash as a predictor of market behavior - interesting, but I can't test it as I don't have access to the right data.