Our resident chart expert, Jordan Kotick, Global Head of Technical Strategy at Barclays Capital tells why trading volume has been so low.
Q- Volume continues to be a concern for many investors. Simply speaking, it is not and has not been particularly strong.
What do you make of this?
A- If you had made your investment decisions based on volume, you would have missed the last 12 months of upside because as you say, volume has lagged, not been particularly strong. However, volume, always a key component for equities, is rarely black and white. It must be interpreted. Usually you want volume to trend with the market to confirm the move. But, after a stock market crash, volume tends to fall or at least severely lag for anywhere from 1 - 3 years depending on how you measure it. It happened in 1987, it happened after the crash from the Internet bubble and it is happening again.
Q- So you are not concerned then about poor volume?
A - Yes, absolutely, we are. But it is not enough to make us bearish since when we turned bullish equities in Q1 last year, we expected volume to lag. We expect it to lag further. But some volume studies, like On Balance Volume (OBV) are bullishly supportive. This measure, which marries volume to price change, is trending with the market.
Q- Explain a little more about OBV...
A - Sure. It is a straightforward calculation. If the close of the day is positive, trading volume is added to the OBV. If the close is negative, trading volume is subtracted to the OBV. So while the general public is not overly aggressive in stocks (as seen through lagging overall volume), those that are participating (likely professionals) are adding to the directional pressure as the market goes higher, not as it goes lower.
Q- Anything else you are watching?
A- Overall, in late Q4, we called for a strong year for Japanese equities. We still like the upside. The Nikkei, TOPIX, Nasdaq, still look bullish to us. Now, other Japanese indices like the Mothers Index, are also trying to stage bullish chart breaks. This is good for Japanese equities and good for risk overall given that Japanese equities have lagged equities in the bull moves the last few years.
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