The adage of Wall Street veterans is that “it’s all about the money,” but quantity shouldn’t be ignored.
Accurately understanding the level of volume and trading activity gives investors a clearer picture of the strength of stocks and markets. And unusual changes in volume can help point out potential changes in price direction to investors.
But first, let’s take a step back and explain what volume is, what is typical of the market, and where it comes from.
When a trader completes a trade to sell 100 shares of XYZ stock to a buyer, the trade counts as 100 shares instead of 200 shares in volume. Volume on the New York Stock Exchange averaged 3.81 billion shares over the 50 sessions ending Oct. 3. An average of 5.52 billion shares trade each day on the Nasdaq.
Institutional investors such as investment trusts and national pension funds account for the majority of trading volume on a given day. Therefore, abnormally high trading volume indicates that major investors are increasing their buying demand and selling pressure.
Generally, if a large number of stocks are rising above the average, it is a sign that demand is plentiful. Stock prices are likely to rise in the future. The drop in stock prices in heavy trading suggests that the sell-off is bound to continue. Therefore, the first rule of volume analysis is to combine volume analysis with price movements.
market volume
Volume also helps investors determine the bottom or top of the overall market.
A series of declines in the S&P 500 or Nasdaq that are larger than the previous day often indicate that institutional investors are exiting the market. If an index is hitting new highs but fewer shares are being traded, it may also be a sign that demand is waning. These are known as “distribution dates” (Wall Street parlance for sell) and are often a signal for investors to sell before the overall market falls further.
When it comes to major market lows, Investor’s Business Daily research dating back to 1900 found that every major bottom had a so-called follow-through day. When the market starts to rebound after a correction or bear market, pay attention to whether at least one major index rises by at least 1% to 2% or more within at least four days of the index low. If these profits occur more than on the previous trading day, it is a bullish signal.
One of the best examples of a follow-through day occurred in the shadow of the post-financial crisis market crash on March 18, 2009, when the S&P 500 Index rose 2.1% and volume soared by 3 billion shares. This occurred approximately seven business days after the bear market bottom on March 9, 2009, and began the second longest bull market in U.S. history.
The most recent sign of bottoming appeared on August 13th in the follow-through of the Nasdaq and S&P 500. Today, the Nasdaq has accumulated about six distribution dates over the past five weeks. Although the signs of a ceiling are far from conclusive, we are starting to see some bearish signs.
Stock amount
Volume is also important in understanding individual stock prices. If a stock continues to make new highs even though volume is trending down, consider it a bearish sign.
Take consumer electronics manufacturer SharkNinja, for example. Volume increased even more when SharkNinja hit a new high in mid-February after seven weeks without a new high. More than 8 million shares traded during the week of February 12, compared to an average of just 3.4 million shares over the previous eight weeks, indicating that large investors are buying into the stock.
SharkNinja then rose 60% through the week of June 17th. That lofty run included several weeks of above-average gains.
David Saito-Chung is deputy market editor at Investors Business Daily and co-host of IBD Live. X Follow him at @IBD_DChung or email david.chung@investors.com.
