April 12, 2012
Trading 'volume' is defined as the number of shares bought or sold during a given time period. Technical analysts believe it is a powerful tool for confirming trends in prices, or rather shifts in the market's supply and demand. If a price trend has a lot of volume then the trend is supported and an investor can have more confidence in the trend. If a price trend has little volume then the trend is not supported and an investor should be skeptical.
One of the lead articles on CNBC.com recently was about trading volume in stocks. It asks a rather poignant question: "How can stocks be in their fourth year of a bull market and trading activity be so low?" It is a question that ought to make investors nervous. The low volume of this bull market has left many wondering who's buying and if there is any conviction in the rally. Furthermore, today's market is characterized by heavy "program trading" that is done in micro-seconds by computers. These programmed trades are not actual positions based on future expectations. Rather they are just trying to take advantage of ultra-short term prices disparities. This is important because oftentimes volumes are what separates bull market rallies from bear market rallies. The bottom line for the bull market is that this emperor has no clothes.
Brennan R. Redmond, CFA Vice President
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities)