Where has all the Volume Gone?

Monday this week we saw the markets test their January and February highs only to pull back and continue their sideways “trend”. The most notable factor in this recent sideways move has been the completely lack of volume which also means the absence of big players in the markets. When I noticed this theme a couple days ago I wasn’t completely sure what to make of it, initially I assumed it was a bearish signal but I decided to run a back test to see how these situations had played out in the past.

I designed a system that would buy if we saw a 3 percent rise in the S&P 500 over a 5 day period followed by a day in which the volume was at its lowest point in the last 30 days. The blue arrows on the chart below show examples of entry points for this system.


and here are the results:


As you can see we had rather negative short term results (2 and 3 days out) with the market lower 60% of the time during that period. One thing that did surprise me however was the high percentage of profitable trades as we moved further out in the study. This most likely means that in the past low volume days have served as a period of consolidation after the previous market move, during this time institutional investors sit on the sidelines before reentering on the next leg up.

If this test is any indication investors should be cautious near term while looking out for potential upside in the weeks ahead.

Andrew