Thursday, August 27, 2009

Volume Explained?

I just read a discussion on the web about volume. Specifically, it was about the lack of volume on a particular stock's breakout but it makes total sense for the market as a whole, too.

With all the off-exchange activity, ECNs and the mysterious dark pools (cue spooky music), it seems that volume as an indicator is going the way of the specialist on the floor. Its not that volume does not matter but the way it is reported is not working any more.

There goes all those volume based indicators. It was bad enough when we lost the power of tick based indicators like tick and money flow (birinyi/worden) when they went to pennies. Sayonara to cumulative volume and that other money flow I never figured out anyway (zweig?).

So, now we know how the market rallied for five months on shrinking volume statistics.

One more reason we need an overhaul on technical analysis.

8 comments:

joed said...

The more things change the more they stay the same. I actually favor your previous blog entry where you suggested a market breakdown would clear out the forest and hence clean up signals so to speak!!!!

Ramu said...

Score 1 for Bears. I know its way too early. But badly need some positiveness in my thinking. :)

Ramu said...

Mike? Did we score or not? The reversal was pretty strong. It didnt recover towards the end of the day (only a little).

William said...

Or maybe the volume has explained what has happened perfectly- the whole thing was a bear market rally... Seems far fetched now, but so was a 350 S&P point rally in 6 months in March. Time will tell, and we shall see.

g89521 said...

I have enjoyed your Barrons column for a long time. This is my first visit to your blog.

As a retail trader who is taking his first CMT exam in October, I found this "Volume explained" blog helpful, but also alarming.

Helpful because of its confirmation, from a seasoned pro, what I have sensed for some time...something isn't right, i.e. that our fundamental values of fair and open markets (ideally everyone trading on the same information available at the same time, including volume) has become totally compromised.
...OK, now I feel better (so what?)

Alarming because there seems to be no outrage, in the public discussion and amoung regulators, against the increasing amount of off-exchange activity. How about a repeat of the backlash against naked shorting? Rather than us holding the indicators accountable, how about our regulators earning their pay by returning our markets back to EVERYONE, and outlawing all off-exchange buy/sell transactions of publicly-traded financial instruments?

Of course your point is, what do we do in the meantime while we wait for the SEC, FINRA etc. to grow some cojones and clean this up?
IMHO, adapting to changing conditions makes sense, as long as it is not taken as tacit approval of what's really wrong here and does not divert energy from fixing it.
In your opinion, is it even possible to bring all price and volume information fully back into realtime public view? If so, what would have to happen to get the ball rolling?
I realize this is more a political question than a financial one.

Thank you.

Quick Takes Pro said...

g89521,

What would get regulators to act? Why a crisis they should have prevented and now will look in the rear view mirror to fix - Madoff comes to mind. So does the uptick rule.

Our job is to adapt to what is, not what should be. I did not heed that advice since the July breakout and suffered.

I think stock trading has jumped the shark (see http://quicktakespro.blogspot.com/2009/08/stocks-have-jumped-shark.html) and the landscape is forever changed.

The Muckraker said...

Can you point us to the piece on volume?

Quick Takes Pro said...

Muck,

There was not paper or research quoted. Rather, it was an informal discussion in a professional chat room.