RE: fading volume

Posted on | Wednesday, December 16, 2009 | No Comments

Barry Ritholtz ponders the following:

Here is another chart that worth pondering: Why has this rally continued on faltering volume? Why isn’t there greaterinstitutional participation in this?

The reason is, the largest spike in vol is inst paper buying and removing supply from the market. To the right of that, the 2nd largest volume spike on the chart is the continuation of the buying which also encapsulated the 666 spx lows. The removal of supply during these two periods (2 months of buying) created an imbalance of demand which resulted in rising prices.

How do we know this to be true?
Prices are rising, they cannot continue to fall in the absence of supply.

Why isn’t there greaterinstitutional participation in this?
They already did participate, in October and again in March.

However the same rules apply, the upward trend cannot continue in the absence of demand. This demand needs to be overpowered per se by a greater amount of supply. When that time comes, we will see 1 of two extremes, an enormous spike in volume, or a total absence of volume.We have yet to see either.

Note the two spikes in volume on the DJIA near the highs. The first pushed prices way down only to have them test the highs again but on dramatically less volume. That first push down removed demand from the market. We know this bc new high prints happened on low volume (no buyers) shortly thereafter. The 2nd vol spike again pushes prices lower in a similar way as before, again removing demand from the market by flooding it with supply. These are exactly the two situations we will see when the market is about to turn on the current rally.

Something to note is volume in December is usually always low because of Christmas. There is nothing abnormal with the current months volume and we still have two weeks left.

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