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Volume is declining

Troy Bombardia
2020-07-08
The stock market is rallying on thinner volume. Is this something to worry about, or is it merely due to seasonality?

The U.S. stock market, and in particular tech stocks, continues to trend higher. In the meantime, volume has been trending lower. This is often seen as a bearish sign of non-confirmation by market technicians, but evidence for this theory is shaky at best, particularly during the holidays.

The following chart looks at SPY vs. its volume's 3 day average:

When SPY's volume swung from extremely high to extremely low over the past 100 days,  this wasn't a consistently bearish sign for stocks on any time frame. Sure, this did happen during the 2007-2009 bear market and 2000-2002 bear market, but it also occurred during plenty of bullish cases:

Since VIX moves inversely with the S&P, this wasn't a compelling bullish or bearish factor for VIX:

Overall, there are plenty of reasons to be cautious towards stocks right now. I wouldn't consider low volume to be one of those reasons, particularly during summer (which usually witnesses lower volume).

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