S126 - NYSE Volume

 

Stock prices like to travel in trends. And one of the core tenets of our risk management process is to follow significant stock price trends.

But prices aren’t the only things that trend. We’ve also found that stock trading volumes have their own trends associated with them. And historically, trends in trading volume have often corresponded with trends in stock prices.

The indicator above shows this concept in action. The top clip shows the monthly closing prices of the Dow Jones Industrial Average, a popular measure of the overall stock market. On the bottom are the monthly averages of total daily volume on the New York Stock Exchange (NYSE).

More specifically, the red line is what we call a deviation-from-trend indicator, which is applied to the NYSE trading volume numbers. This deviation-from-trend indicator is based on the ratio of a shorter monthly moving average (4 months) to a longer monthly moving average (12 months).

When the deviation-from-trend measure rises above the upper standard deviation bracket (black dashed line), it signals strongly rising volumes. Historically, this has corresponded with above-average stock returns—roughly 9.8% per year, on average. But when it has fallen below the lower standard deviation bracket, volume has been relatively light. Historically, stocks have registered below-average gains, on average, when this has been the case.

This indicator is useful because it’s intuitive. Volume is a measure of how many shares are being traded in the stock market. The more volume there is, the more conviction traders have, which helps bolster stock prices.

But this indicator is also useful because it adjusts trading volume over time. By using the deviation-from-trend format coupled with standard deviation brackets, this indicator oscillates up and down in a way that clues us into whether trading volume is high or low relative to its recent average.

 

This is intended for informational purposes only and should not be used as the primary basis for an investment decision.  Consult an advisor for your personal situation.

Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.

Past performance does not guarantee future results.