DOES LOW VOLUME INDICATE BEAR MARKET?

There is a common knowledge that the low volume means not enough investor on the buying side and lack of confidence in bulls so the market main trend is bearish and it needs to come down. In the last couple of years always heard the echo "lack of confidence", "prices are too high", "no volume, no bulls”, etc. But the fact is the Dow is over 17.000. So, what is wrong with this volume issues?

If you look at the chart below by Tabb Group, you can find there is a negative correlation in terms of volume and market decline. The top of the volume was in 2009, 12,3 billion share/day dropped to the recent level of 5,8 billion share/day. It means 200 million share/day more or less. That is bigger than 50% decline. Surprisingly the highest volume was at the financial crisis.

The one billion dollar question, why is the volume coming off? It seems to me couple of reasons:

• High frequency trading is falling since the top of 2009. Dropped that kind of volume by around 13%. 
• More money is being invested in index funds and less in the actively managed stock funds. The flagship and pioneer of this invention is the John Bogel’ Vanguaard 500 fund. 
• The investors are prefer the futures and options instead owning single stocks. While stock trading declined, the opposite has happened with equity futures and options. 5 times higher volume on futures now than it was in 2009. 
• Since the 2009 mortgage crisis the big banks reduced their speculative exposure. Due to the Dodd-Frank regulation that restricts banks from proprietary and speculative trading. 

All in all don’t take too seriously the volume indicator and honestly we have been never fearful about the concerns of volume because the market since 2009 was obvious for us just buy and never sell.

The BFM Assets Team.