Sometimes a low volume rally is bullish!

Its normal to see lower volume over the summer. However, it’s also fairly typical to see less upside on the markets along with that low volume – especially in August and September.

An unusual situation occurred in August—the market rose in somewhat in a somewhat parabolic fashion on declining volume. Jason Goepfert of www.sentimentrader.com has this to say about such occurrences:

“Since 1940, there were 446 new highs on below-average volume, and 1379 new highs on above-average volume. There was a bit of truth to traders’ fears, as new highs on below-average volume under-performed above-average volume new highs by a significant margin after six months and one year.

An odd wrinkle, though, is that new highs on *extremely* below average volume tended to do quite well. There were 34 days when the S&P set a 52-week high and 10-day average volume sunk to its lowest level in three months. After those days, the S&P was higher three months later 89% of the time, averaging +3.0%. Its returns six months later averaged +3.6% and one year later +9.5%.”

It may be slightly negative for the current rash of new highs to occur on lower volume such as has occurred last month, but it’s not a deal-breaker. As Jason notes, extremely low volume with a new high is not necessarily a bad thing.

Note: I will be away for the second half of this week mountain biking on the west coast, thus will not be posting a second blog. Back again next Monday.

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