Stock trading volume in the rally: Not as weak as it seems

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As stocks have rallied this summer, skeptics have bemoaned a perceived lack of trading volume as a decidedly bearish sign.

Light trading activity, they say, shows a dearth of bullish conviction and puts the market at risk of a significant correction.

But is volume really so weak? According to data compiled by Phil Roth, a technical analyst at brokerage Miller Tabak & Co. in New York, it’s actually quite the opposite.

New York Stock Exchange composite trading volume -- that is, total volume on the NYSE trading floor and on the various electronic markets that trade NYSE-listed shares -- has averaged nearly 4.8 billion shares a day this month, according to Roth.

That’s down from the 6.1-billion daily average in the first half of the year, but volume always tails off in the summer, Roth points out.

And the July activity far exceeds the 3-billion daily average for all of last year, which itself was a record, he said.

‘We’ve just gotten inured to gigantic trading volume,’ Roth said. ‘I think this is normal and it’s not bearish.’

Part of the reason volume may appear low, he said, is that many analysts pay attention only to how many shares change hands on the exchange itself. But that number has been slipping as electronic venues increasingly siphon action from the NYSE. Today, only about 25% of all trading in NYSE-listed stocks goes through the floor, Roth said.

Still, many analysts would like to see volume increase as the market rallies. The Standard & Poor’s 500 index surged 11.4% in the two weeks ended Friday, but any sustained upturn is going to need bulls to keep piling in, and that would clearly be shown in trading activity.

Though volume hasn’t been as weak as the bears contend, it’s still the ‘missing ingredient’ of the current rally, said John Wilson, chief technical strategist at Morgan Keegan & Co.

He attributes it to ‘nervousness on both sides,’ with bears afraid to jump in after such a big market move and bulls afraid to sell but putting new money to work only gently.

Volume spiked last Thursday when the Dow Jones industrial average rallied 188 points to vault above 9,000. NYSE volume in that session was 9% above its 50-day average; the jump in Nasdaq volume for the day was 34%, Wilson said.

‘I’m not worried right now but I’d feel a lot better to have a few more days like last Thursday,’ Wilson said.

-- Walter Hamilton