Yesterday’s robust market advance was accompanied by reasonably solid volume.
SPDR S&P 500 (SPY),
PowerShares QQQ (QQQ) and
SPDR DJIA (DIA) all exceeded their respective three-month average daily trading volumes according to data on
Yahoo! Finance. The market attempted to follow through on yesterday’s move today, but finished off its highs in a meager volume session. Not only have the “Best Six/Eights Months” for stocks come to an end, it also appears the summer doldrums have arrived.
We refer to the summer months as the doldrums due to the anemic volume and uninspired trading on Wall Street. The individual trader, if they are looking to sell a stock, is generally met with disinterest from the street. It becomes very difficult to sell a stock at a good price. That is also why many summer rallies tend to be short lived and are quickly followed by a pullback or correction.
Volume Surrounding Holidays
In the table below we have beefed up the holiday trading table from page 84 of the Stock Trader’s Almanac to illustrate the effects of dramatic changes in trading volume before and after holidays. As with all the graphs and charts in this study, the volume numbers in this table are based on the deviation from the annual average daily volume. But first we need to take into consideration the shortened trading days that occur around certain holidays.
Thanksgiving has the most consistent “half day” of all the holidays. Since 1992 the New York Stock Exchange (NYSE) has closed early and the roughly 50% reduction in trading should not be surprising as many people stay home recovering from the previous day’s feast and spend time with family. However, it seems that those that do trade are in good spirits, generally driving prices higher on the best post-holiday trading day of the bunch.
The day before and after Independence Day and Christmas do not close early as regularly, but have many early closings; when the respective holiday lands on a weekday. In any event all these annual average daily volume deviations provide a useful benchmark for evaluating the relevance or importance of a market move surrounding a holiday.
3-Day Weekends
Monitoring market performance on the individual days of the week has been revealing over the years. The insights were so inspiring that our iconoclastic founder and resident consigliere, Yale Hirsch, entitled his 1986 book Don’t Sell Stocks on Monday. In the following charts we have lined up the performance on each day of the week from pages 141 and 142 of the Almanac with annual average daily volume deviations for each day.
Not surprising, Monday, or the first trading day of the week shows substantially reduced trading volume on both the NYSE and NASDAQ of about 9% below the average. Friday is also below average. This underscores the recent trend of market gains being concentrated midweek and weakness at the beginning and end of weeks.
Apparently, traders and investors prefer long weekends; or at least not being exposed going into the weekend and being more tentative about taking new positions upon their return. Picking up stocks on Monday weakness and unloading during midweek strength on higher volume would appear to be a prudent strategy for the most part. It also pays to be keen to price and volume action on Fridays and the following Monday for indications of future market direction. Strong volume and price advances tend to be bullish, while back-to-back weakness on normal or elevated volume is frequently bearish.
Volume Lags
Examining the typical monthly price patterns from pages 145 and 146 of the Almanac in conjunction with the annual average daily volume deviations for each day below exposes the “follower” tendencies of market participants. Note how volume picks up after the usual month-end price gains and even more substantially following the normal mid-month surge.
Similar to the days of the week pattern, it makes sense to go against the crowd. Going long or covering shorts after midmonth into higher volume and selling or shorting the last few days of the month and into the first half as prices rise and volume declines appears to make the most sense.
Big Picture
Below we have plotted the one-year seasonal volume patterns since 1965 for the NYSE and 1978 for NASDAQ against the annual average daily volume moving average for 2015 so far. The typical summer lull is highlighted in yellow. Note the spike in volume that occurred in late April and May as the market began to sell-off after mid-month. The recent volume trend for the current year (red line) shows a perennial trail off in volume may be underway.
An atypical surge in volume this summer, especially accompanied by outsized gains, would be an encouraging sign that the bull market will continue. However, should traders lose their conviction and participate in the annual summer exodus from The Street, the long absent 10% market correction could quickly unfold.