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Wednesday, March 21, 2018
Article written by Larry Potter

Should You Wait On Volume Before Buying A Stock?

Where's the beef? Remember that old commercial? I have no clue why, but I think of that commercial every time someone mentions that volumes are once again not nearly as robust as we'd like to see in a rising market.

Over the years, one of the most popular adages about trading stocks was that you'd like to see the volume "confirm" the movement. Well that's all fine and dandy, but you often run the risk of sitting around watching stock move higher and higher on no volume, and then kicking yourself for not getting involved. What's going on here?

The market is not the same as it was just 5 years ago folks. This market is driven by program trades, not widespread participation as was always the situation in the past. In years gone buy, live people, making big decisions would make a move to buy stocks, and as they were buying other managers would see the action and they'd buy and so on and so on. Often volume and price appreciation "grew" on each other.

But today, it's computers. Really bright fellows with slide rules (well, maybe little calculators now) and degrees decide what is the "buy area" and sell area for a basket of stocks, based on all sorts of parameters, some of which you'd never know of. For instance there are programs designed to kick in when the futures get too high. Some kick in based on the amount of foreign currency that the particular bank holds. (why? as the currencies fluctuate, they buy and sell stocks as hedges against the currency) Some programs are tied to interest swaps, some to interest rate derivatives, etc etc.

But when they hit, they hit with a vengeance. It's not uncommon for a big outfit like Merrill to buy a basket and drive the DOW up 60 points in literally 15 minutes. Was there an accompanying rise in volume? Yes, but NOT in direct relation to the size of the point move and that is very very important folks. Program trades don't allow time for other investors to analyze what's going on. They must either buy or wait a bit and see what's going on. It's that wait and see hesitancy that often spells out why a lot of program pops are sold back off. No one else bit. But when the DOW moves 60 points and some individual stocks are going up at 2 bucks a clip, should we wait on volume to confirm it? Do so at your own peril.

In 97 we never did a trade unless there was confirming volume. In 98 the volume was there anyway, just like in 99. But, since then, just about every roll higher has been on what one would call "low volume" and frankly I don't pay that awful much attention to it any more. The entire run up of 03 into 04 was accomplished on considerably less volume than the averages would have had us "need". Wait on the volume and miss the ride. Nope, not gunna do it.

Sure volume is important, we'd love to see a price breakout, confirmed by volume, it's got a much better shot at sticking. But I will not hesitate to buy a breakout on lousy volume any more. Hey, I can always sell the darned thing. But, I can't make up a 3 dollar miss out on a breakout. See my point? Good.
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