Should a Rally be Accompanied by Volume?

12/05/2012 4:13 pm EST

Focus: STOCKS

Joe Bell

Senior Market Strategist, Schaeffer’s Investment Research

Should a rally in stocks have strong volume behind it? Not necessarily says Joe Bell. Find out why.

My guest today is Joe Bell from Schaeffer’s Investment Research and we are talking about how this rally has not really been accompanied by the great volume and is that a concern to him?  So Joe, low volume and a rally, is that a concern for you?  

 No, it’s not really a concern because that has sort of been a concern we have heard from a lot of the bears in recent, really for the past several years since March 2009, and one of the big comparisons they always say in March 2009 we had much higher volume than we currently have now, and obviously, any time you have a climactic generational low like that, I think that is sort of like apples and oranges to compare a steady uptrend volume compared to that, but when we went back and looked at it compared to preps like 2003 to 2007 during the bull market we are actually near or above those levels from a volume perspective.  

All right, so does the low volume say that there is not a lot of participation in this rally by the retail side, or where is this money going to come from? 

Yeah, in general like you mentioned the retail crowd, we have seen the inflows and the bond funds and the outflows from the equity funds, so yeah, in general the retail crowd is perhaps on the sidelines.  One other thing that is interesting when you talk about volume is a lot of people refer to low volume on a share basis when you are talking about total shares trading and that makes a lot of sense, but when you compare that historically, especially back in the financial bottom, what were the popular names back then?  You look at the Citigroups and Bank of Americas; they were under $10.  Just from a purely mathematical standpoint, a lot of the names today, Apple and Google are trading at $100, $200, $300 a share, so pure mathematics, perhaps total shares traded is not as high, but when you look at total dollar volume that is actually like I mentioned before above the bull market levels of early 2000.

All right, so when you do see strong volume accompanying this rally, will then that be a contraindicator to say we are looking for a top now.    

Well, if we are going to look at the sentiment chart that is what we kind of call the acceptance phase when money from the sidelines starts to move in; ideally you want to be in that market from a sentiment perspective before that money flows in and that is where you make a lot of your money, so yeah, when that money starts flowing that is when you want to perhaps take some off the table or at least get some profits going and then be aware that optimism is definitely creeping into the market.

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