One of the red flags about the durability and stability of the stock rally since 2010 has been a down trend in volume in each successive up leg and a surge in volume only on down days. People remember the flash crash of May 2010 when the Dow dropped a 1000 points in one day, but few realize there have been a series of mini-crashes in various markets ever since. Markets which are thinly participated are inherently less robust and are more susceptible to high volatility. Our own technical work has highlighted this as a major capital risk repeatedly. Volume has always been a key indicator of market belief and for decades price has always followed volume. This is an inconvenient truth for those who wish to entice greater fools into markets at all times, and so many have taken the position that in our brave new world, volume no longer matters.
Today High Frequency Trading (HFT) is a major driving force in what has become the circus of public markets, now accounting for some 70-80% of volume traded in a given day. Most of these trades are not even completed as they are entered and then cancelled in milliseconds. Truthfully HFT volumes express a false or at best speculative interest more than any expression of “investment” interest. And most importantly, HFT that has unduly effected prices to the upside over the past few years, can also unduly effect prices to the downside as algos extrapolate and magnify selling volumes once bear markets get underway. Thankfully there are still a couple of us who have not drunk the “crazy” Koo-laid.
CNBC’s Rick Santelli explains why it’s important to take a look at a temporary reversal in a stock’s price, along with exchange volume and open interest. Here is a direct link.
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