Friday, March 6, 2009

Can The Market Bottom On Light Volume?

One common misconception about steep selloffs is that they need to be accompanied by high volume in order to mark a bottom. October 10th and (to a lesser degree) November 20th, 2008 are two examples of big down days that came on big volume that soon led to a reversal. While this pattern can precede a bounce, you’d much rather see your new low accompanied by very low volume than very high volume.

Let’s look at some studies to illustrate this claim. First let’s look at performance following a 50-day low that has neither very high nor very low volume: {edit: the following tests were inadvertently run from 1992 - present, not 1960 - present. See March 10th follow-up blog for more details and longer-term results.}
(click to enlarge)

So this is the base case and as you can see there is a slight upside edge over the next 1-20 days.

Now let’s look at the ever-popular high volume selloff:

(click to enlarge)

Results here are nearly indistinguishable from the base case. The high volume, while not a deterrent, does not seem to provide an additional edge.

Now let’s look at the less common case of a 50-day low occurring on light volume:
(click to enlarge)

While the number of instances is less than desired these results are clearly superior to the other scenarios. Over 90% winners after both 4 days and once you get out over 3 weeks. The average trade over the next week and over the next 4 weeks is about 4 times the size of the base case. While they didn’t all mark the exact low, some success stories included 10/7/02, 3/10/03, and 1/24/05.

There are plenty of technical reasons we should see a strong rebound soon. Thursday’s light volume can be added to the list. Now let’s just hope the market stops ignoring these reasons.


Rob Hanna said...

It's been pointed out to me that some data sources are showing Thursday volume to be higher than Wednesday. Such is the difficulty when dealing with volume. There are sometimes slight variations in the data. This appears to be the case on Thursday. So while there may be a question as to whether Thusday's volume was the lowest in 5 days or not, using different sources I found similar results edge-wise.

Rob Hanna

Mabel + Lola said...


Excellent study. I never would have guessed what your results would have been. I am a little nervous of buying over this weekend because of Citi being so low we may be ripe for a deal over the weekend of some sort.

Thanks for sharing.
Eric Wagner

Bill Luby said...

What Eric said.

Yet another fine addition to your excellent body of work, Rob. Now all you have to do is assemble it in some sort of fluid fashion to create a book :)