Michael Santoli’s column this weekend in Barron’s had a fascinating combination of quotes. Mike put together a series of dots. I want to take a shot today at connecting them.
Consider these three ideas:
1. Louise Yamada, longtime technical analyst: “Volume is the weapon of the bull, historically, and is generally essential to push the market higher.”
2. Jeff deGraaf, Renaissance Macro Research: Prior low-volume rallies — 1987, late 1998, 2003 rebound — started on low volumes: “We do not believe that volume over the last two weeks is an ample excuse to stay away from equities. In fact, when volume begins to pick up meaningfully . . . it’s often close to a cyclical [market] peak in need of a consolidation.”
3. Michael Santoli, Barron’s: “It’s yet another way that the market feels like it’s in the low-volume, Fed-medicated, range-trading, easy-corporate-credit, buyout-happy days of the middle part of the last decade.”
What these three comments hint at, but don’t precisely conclude, is that Fed induced rallies tend to be liquidity, not conviction driven. Thus, the anemic volume.
Look at the low volume moves off of the lows that DeGraaf mentioned: 1987, 1998, and 2003; Add to that the fading volume since early 2009. All 4 of these years had major Federal Reserve interventions via a combination of rate changes along with the occasional increases in money supply and/or bond purchases.
Hence, the upward drift on pathetic volume is a function of the Fed, and the network of banks (fractional lending), brokers (margin), hedge funds (leverage) and clearing houses (all of the above) to their clients who ultimately thrive on easy money.
At least, that is my thesis for the ongoing levitation. I have not run the numbers across every major (or minor) rally where the Fed is active. But I have a sneaking suspicion we might a degree of correlation. (and I doubt anyone can seriously argue a lack of causation).
What Is Low Volume Telling Us?
Barron’s APRIL 9, 2011
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