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

Category: Federal Reserve, Markets, Psychology, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Does Fed Intervention Produce Low Volume Rallies?”

  1. RW says:

    I’d feel more confident connecting those dots if I could figure out a decent way to separate the $USD and Yen carry trade, mostly arising as a result of what the central banks are doing indirectly (ZIRP), from what the central bank(s) are doing directly (QE). Could come to the same end I guess but if real interest rates remain negative maybe not, even if the Fed really ends QE.

    This entire run has had me bamboozled and I could never really get out of defensive mode. All my best gains were in trading, longer-term strategic positions mostly lagged. Bummer.

  2. GeorgeBurnsWasRight says:

    Since the majority of the volume comes from machines, does anyone here know how the relative volumes of carbon and silicon trading have dropped during this period?

    Plus, on the carbon side (mostly), it’s my impression that hedge funds have been decreasing their leverage, which I presume also decreases their trading volume.

    Rather than focusing on total volume, I’d be more interested in knowing if we’ve ever been in a long-term uptrending market where volume on down days seems to be significantly higher than volume on up days.

  3. rootless says:

    Well, I have asked a couple of time here and not got any answer, what the supposed causal chain is how the “liquidity” pumped by the Fed in the systems drives the stock market higher. The Fed buys treasuries from the banks and the banks add the money to their reserve accounts with the Fed. And then? How does it work? I don’t understand it.

  4. MayorQuimby says:

    AMAZING people don’t see this for what it is.

    People JUST GOT BURNT by buying into Fed intervention during the housing bubble.

    Bulls are doing the EXACT SAME THING right now!!!

    Think Ben can set the price in perpetuity do ya?!

    Okay. We’ll just see what we will see.

  5. dead hobo says:

    Excellent, grasshopper. Now, assume a system where HFT creates velocity, but confines it to a limited space as opposed to an entire economy. Finally, assume a system optimized to bat around added sums until they dissipate, ready to start anew when a new volume enters the market.

    PS: equity gains from this system can be converted to cash that spends just as well as gains generated the old fashioned way using investor liquidity. As one sage once noted: “you can be right or you can make money” Also, ZH, before they went nuts, regularly graphed this during QE1 where pumps = volume = prices up.

  6. jpmist says:

    “Fed induced rallies tend to be liquidity, not conviction driven”

    I wish someone would connect the dots for me on how a daily $7 billion in the bond market moves the equity market up other the simplistic liquidity = higher equity prices.

    Am I suppose to believe that the unfortunate bond buyers went home empty handed because the Fed bought up all the bonds they wanted, so they bought stocks instead? And then did it under the radar so that stock volumes stayed low?

    “Correlation does not imply causation.” Where have I read that, here maybe?

  7. MayorQuimby says:

    Dead- While you’re correct, the value of whatever you buy with the stolen loot will drop precipitously as soon as Fed intervention stops!

  8. Pantmaker says:

    Fed “intervention” has nothing to do with this rally. QE money basically sits in reserves…it doesn’t “make it’s way into the market.” Ben’s artificially low interest rates and his buy-stocks PR campaign has temporarily encouraged speculation across other asset classes including broad based commodity hoarding…that is all. There is no magic fed hand here that will keep markets from tanking-ass. Same market under all the layers of silliness here…buy low sell high…never changes.

  9. tomster0126 says:

    Purely a short-term fix and a Band-Aid on this whole situation. They’re only looking to mend wounds for about 5 years, after that they’ll have to figure something else out but nothing about last night’s solution promises any real long-term change.

  10. sethbru says:

    You wrote: “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.”

    Do you have any data about what happens AFTER those low volume rallies you cited as precendent? If I recall, 2003 was not followed by a major decline in the following year. Same for 2009, 1998, and 1987 (asssuming you referred to the rally after the ’87 crash). So, given these precedents, we are looking good for another year or 2, eh?

  11. wunsacon says:

    jpmist, when yields are so low, where else do you expect people to invest? In 1% CD’s? No, *SOME* put it in the market. And, when they do, others see the market action and follow.

  12. Mehdi says:

    Just read your last post on volume and wanted to ask a ‘somewhat’ related question that for the longest time has been on my mind. If truly for every seller there has to be a buyer who is willing to take the opposite side of the trade and thus think exactly opposite on the outcome of that trade, then usual technical analysis that looks at volume and price breakouts that attempts to look for signals showing whether ‘smart money’ is accumulating or selling a stock is a useless endeavor.

    After all if supposedly ‘smart money’ is dumping large blocks of XYZ on a particular day then only an equal size buyer which can also be labeled as ‘smart money’ has to take the other side of the trade. Unless if we assume in certain times given their role in the markets specialists and market makers are forced to take the other side even though they may know or think the trade may go the other way for them which then may make look at volume as not a useless endeavor. What do you think?

  13. [...] does the Fed have to do with this low volume market?  (Big Picture, [...]

  14. DeDude says:

    If the market is certain that the Fed will exit and that this will cause a dip in bond prices, then people will put off the purchase of bonds. So to some extend QE2 is causing a lack of demand for bonds – and that is probably why it didn’t have that much an influence on bond prices. But if makes sense if some of all that cash, sitting and waiting for the drop in bond prices after the Fed gets out, would dribble into stocks as long as stocks have gains. When we get closer to the time where people think they will be jumping into bonds, they will be less inclined to “park” money in stocks and more inclined to take it out in panic on big dips.

  15. rktbrkr says:

    “…At a time where the government has demonstrated a complete lack of will over $38 billion, we are left in the hands of Ben to determine short term rates, influence the curve, and Timmy to determine what maturity profile that ‘best meets our needs’. The actions of either of these two unelected individuals could dwarf the $38 billion as every 1% of increased borrowing costs would cost $143 billion. Since the government could barely deal with $38 billion, how will they deal with increased borrowing costs? Does even congress know just how trivial their cuts look relative to the potential increases in debt cost?”

    Zero Hedge also points out that the Fed has covered 83% of Treasury borrowing since QEII and 91% of 2009 financing all tolled.You can quibble with ZH numbers but US borrowing costs could zoom when Supertanker Bernanke changes course. a 4% increase in US borrowing costs would be 1.1Trillion, game, set and match over.

    The Fed really can’t stop the easy money course and must go with hyperinflation and dollar destruction to solve the US deficit problem (also maybe the banks millions of shadow inventory homes)

  16. [...] Does Fed Intervention Produce Low Volume Rallies? (TBP) [...]

  17. seneca says:

    Using pure reason (as opposed to empirical evidence), it seems reasonable that low volume caused by fear and doubt would be a positive, sustainable condition for a rally to tip-toe indefinitely higher. When the volume spikes because of a sudden surge in conviction, THAT would be the bell ringer for an impending top in prices.

  18. wally says:

    “liquidity, not conviction driven”

    Is there any investment today that is otherwise?

  19. jpmist says:

    @wunsacon “when yields are so low, where else do you expect people to invest?” Nice try, yields have increased since QE II started. My argument is that there’s no direct connection between QE II and higher equity prices, but there is obviously a sentiment that there is. In 2007 the sentiment was that CMO’s were rock solid because real estate markets never declined in unison ever before. In other words, just because everyone believes it, doesn’t make it true.

    Just listened to a podcast where Tom McClellan was quoted as saying only 25% of trading volume occurs on the exchanges, the rest in “dark pools”. So in reality, we have no idea what trading volume actually is anymore especially when high frequency traders are churning thousands of trades a minute in either direction. Is HTF trading the same volume as it was in 2009? Probably not. Isn’t is scary that we don’t know?

  20. Many charts continue to reflect uncertainty and lack of consensus by market participants but one chart pattern has remained constant: the megaphone wedge on the monthly S&P500.


  21. nofoulsontheplayground says:

    Remember that even when QE2 ends in June, QE Lite is still going to be pumping about $35-billion/month into the system through roll-overs on the Fed’s sheet.

    If the Fed’s balance sheet does not shrink post QE2, the equity and commodity markets may not correct as severely as summer 2010. Furthermore, weather patterns point to a repeat of last years drought conditions, which should continue to pressure food prices.

    I see the Fed’s window for QE3 opening sometime in early 2012 and running for about 6-months. They will probably shut down a 3rd QE prior to the fall 2012 elections if they do go to QE3.