Understanding Volume

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Analysis

Volume is an underappreciated statistic.

When people ask how the market did today, they rarely ask about volume. Yet volume tells as much about market strength as price movements in the Dow Jones Industrial Average or the Standard & Poor's 500 Index. Volume indicates how meaningful a market movement is.

Large percentage increases accompanied by large volumes are a solid indication of market strength. In contrast, large percentage increases accompanied by small volumes are less likely to indicate a market direction.

Market volume is a relative term and needs to be compared to the average daily volume of the index or stock in question. This number is sometimes difficult to obtain. For example, average daily volume of the Dow Jones Industrial Average is rarely publicized. Nevertheless it is useful to know the number.

Volume on Individual Stocks

Average daily volume for an individual stock is also a difficult number to obtain sometimes, however it is extremely helpful to have at least a "feel" for the average volume. This will help you make a judgment on how meaningful a large percentage movement in the stock is.

A large percentage price increase accompanied by a higher than average volume is a strong indicator of future price movements. A large percentage price movement accompanied by lower than average volume is a very weak indicator of higher prices, and is, in fact, an indicator that a correction in prices is possible.

Similarly, a large downward price movement accompanied by higher than average volume is a strong indicator that the stock will continue to move downward.

Most intriguing of all, however, is higher than average volume accompanied by no price movement. This generally indicates something happening behind the scenes, such as a news event or rumor, but the buying is not accompanied by market orders. Determining what is happening when accumulation of this kind occurs can be difficult, but sometimes rewarding.

Thin Volume

On extremely thinly traded stocks volume is an important indicator of value. For example, there are some investors whose holdings are larger than the average daily volume of a stock. If this is the case, you simply cannot compute your holdings value by multiplying the price times your shares.

Why? You aren't likely to get the current price if you unload it all at one time. When your volume gets close to the daily volume size, your own actions will more than likely affect the price.

In any event, watching volume as well as price is always helpful.

Robert V. Green

MARKET PLACE