Sometimes a low volume rally is bullish!

S&P nearterm

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.

buckwallow

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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