Does Volume Really Matter?
This market really doesn’t know what it wants to do. It tries to go up; the bears step in. It tries to go down; the bulls step in. There’s a fair bit of trading going on – QQQ hasn’t had a day with below-average volume since 20th February, SPY has had only 2 and they weren’t much below. So, everybody is trading madly – and the market is going nowhere. The question is: is volume a reliable indicator?
Capitulation
High volume often occurs at a market bottom. It’s called Capitulation, and is a sharp panic driven sell-off where traders give up and sell in droves. It typically marks a market bottom because emotionally driven sellers (often called ‘low conviction’ investors) have all exited the market, selling pressure has been exhausted and contrarian buyers start to step in.
What happens is:
- Massive spike in volume
- Sharp price drop, sometimes with a large gap down
- Emotionally driven: fear, despair, forced liquidation
- Often dramatic and fast
Capitulation is usually followed by a strong bounce or bottom. The panic and surrender, which signaled a climactic bottom. has worn itself out and the worst selling is over.
BUT can we rely on it? Here is a recent case when it worked:
And here is a case when it didn’t!
Exhaustion
Another volume indicator is Exhaustion. Exhaustion is a final burst of buying or selling after a sustained trend, showing the trend is running out of momentum and may reverse. Unlike capitulation, exhaustion can happen at the top of an uptrend as well as the bottom of a down trend.
BULLISH EXHAUSTION
Buying momentum fades after an uptrend, usually:
- A final surge in price on high volume
- Possibly a gap up that fails to hold
- Reversal candles (e.g. shooting star, bearish engulfing)
- Sign of buyers being exhausted and unable to push the price higher.
BEARISH EXHAUSTION
Selling pressure fades after a downtrend. Unlike capitulation it is more gradual, where the volume tapers off. The sellers are fatigued rather than panicked, and the price slows down rather than collapses. Instead of a violent bounce, there is usually a stabilization or reversal.
Bearish Exhaustion: Sellers run out of gas.
Capitulation: Sellers throw in the towel.
An example of exhaustion is the Covid Bear – you can see that there was a huge increase in volume on the way down, but it was tapering off for a couple of weeks before the bottom.
Was it Bullish Exhaustion?
I think what we have had this year is bullish exhaustion. I had been worried about the sideways trading on small volumes and the inability to move higher. You can see that during January and the first half of February the volumes were mostly below average (the blue line). The volumes jumped when the price started falling.
Should we have acted?
Naturally, in hindsight, we think that we should have. But would it have been wise? Trading signals are not always to be relied on. Here’s the top of the bull market in 2021:
You can see that the volumes were a bit down on the up days, but that happens even in the middle of uptrends. Next week we’ll have a look at the OBV (On Balance Volume) indicator.
SPY Volume for the last 30 years
Here’s SPY since it started in 1993 with the volume.
What can we deduce from this? The surprising thig is that the volume is going dow, although the price has gone up so probably a chart showing the Value of the trades would be going up. You can see that it really didn’t get going until after the Tech Wreck bear, and then the volumes increased hugely. Then they started to taper off – why?
My guess is that it was the number of ETFs on offer.
Of course, I can’t say definitively that that is the reason, but it seems a good explanation. The money was spread over a larger number of ETFs. The assets under management have exploded also.
At the end of January, SPY had a net asset value (NAV) of $604 billion, with Assets under management of $633 billion. By March 20, 2025 these numbers had reduced to $566 and $587, so you see that we are not the only ones suffering!
ETFs as Share of Total Market
You can see from the chart that trading volumes increase during periods of market turbulence, and account for a larger share of the total stock market trading. On December 24. 2018 when the S&P 500 was nearing bear market territory, ETF trading accounted for 43% of volume. During the GFC it reached 40%. Usually, it is around 30%.
Note: I am not suggesting that we are headed into a bear market; it was more a tongue in cheek name to head off any comments that I was being mean to Biden!
To the markets
A relatively quiet week with SPY trading in the 560-570 range. Lots of chatter about tariffs and inflation, but the Fed meeting did not produce any surprises.
SPY Charts
We’ve already looked at SPY. 570 (the blue line) seems to be a significant level as you can see, but that is based on very few data points. Some of you may notice that an ascending triangle is forming which is generally accepted as a bullish pattern BUT it is mainly a continuation pattern in an uptrend.
They can form after a downtrend, in which case it is a reversal pattern (flat resistance with prices struggling to break a level, higher lows showing that it is gaining strength) but not as strong a signal as in an uptrend. And, BTW, the Darvas boxes look pretty silly now!
On the longer term chart there is an interesting dynamic. Clearly, we are out of our lovely trading range <sob> and out of the sideways trading range, but 2 previous highs at 560 may be proving to be a support level. We will know one way or another in the next couple of weeks.
SPYG Charts
SPYG is exhibiting the same pattern as SPY, so the comments about support / resistance (at 83) and the ascending triangle also hold here.
On the weekly chart we are right out of the trading channel and sitting on a possible support level, but that’s a bit tenuous.
QQQ Charts
I’ve put the volume on this chart also – you can see the below average (blue line) trading volume for most of this year, until the downturn started mid-February, showing that there was not a lot of conviction among traders who were sitting on the sidelines waiting to see what was happening. I’ve drawn in the ascending triangle here also.
On the long term chart, we’ve not only dropped out of our trading channel (blue), but we’ve also dropped through the long term uptrend (purple) the chart shows limited support at 480 and a more established level at 450.
VIX Chart (Volatility)
The VIX is settling down and is under 20 again (low volatility territory).
ITMeter
The week ahead . .
I expect the MSM (mainstream media) will be full of rumors about tariffs which are supposed to start on April 2nd. I have no idea what will happen, we’ll just have to watch the charts and be ready to get back in if we get a signal.
I am optimistic about the market in the longer term; it is just this indecision and volatility that is hard to handle. However, we know we are safer out until we get a clear market signal.
The Futures
The futures are up on the rumor that the tariffs ill be limited to 15 countries and not across sectors (according to Bloomberg and the WSJ). I have noticed in the last couple of months that trading often goes the opposite way once the market opens, which has not been normal for the last couple of years.
In a few weeks . . .
I shall be off on my summer (read ‘winter in Australia’) travels. I will try to keep the Blog going, but some of that time I will be above the Arctic Circle so I have no idea what the comms will be like! Usually at this time of year in WA you feel that summer is over – but today is going to be 35C (95F) and this was the beach this morning.
That’s hard to leave behind. Really, we are spoiled here in WA!
Fingers crossed – not sure for what!
Heather
18 Responses
Enjoy your break!
The markets will be here when you get back.
Thank you Kate!
Thanks for the clarification.
Hi Heather,
When I sold my positions due to the death cross I was left with a much lower balance than when I was in the market to the point that I can only buy 1 SPY option now versus holding 2 SPYG and 1 SPY before death cross. I might actually need to contribute $500-1000 extra when the next golden cross presents itself in order to buy only 1 SPY option. I am a little versus about this. Would you please share your opinion or experience on this?
Hi Elijah (?)
If it were me, I would get the SPY option – SPY (based on 500 stocks) being more stable and predictable that SPYG (211 stocks).
The SPYG stocks are selected as ‘growth stocks’ and have more exposure to the tech sector. While they have exactly the same 10 tech stocks in both SPY and SPYG, the percentage that they make up in SPYG is 50.29% and in SPY 33.24%.
This means that SPYG is more volatile – but if you are optomistic about the whole AI boom then maybe you would prefer to go that way.
It comes down to tolerance of volatility – and sleeping at night!
Hope this helps
h
My sincere apologies H… my first two comments were directed to the market itself… the Last comment was about my past. Your technique/s and advice is about the soundest i’ve have ever heard or read. Please … never take my comments to be directed towards you. I’m grateful i’ve stumbled on to someone like you…
r
OH, thank you Randy!
Apology gratefully accepted, but not required!
I’m probably a bit too sensitive – I worry that i’m advising people to do the wrong thing.
Not in the long run, of course; I am quite confident of that. But we can lose in the short term – its a matter of balancing the risks.
Anhd the market is just about to open – UP!!!
Now I have to work out if / when the golden cross is going to happen.
Thank you!
h
Excellent analysis as usual.
Thank you Tommy!
Guess i have to pull the old monkey out of the closet… You remember the old monkey! the one that during a bull market “ it “ could throw a dart against the wall that had the stock market companies and it picked the one that would go up… or wait for the Lemmings and hope they don’t go over a cliff… Or the most reliable stock market indicator in history …
the old “ pull some money out the stock market to buy something “ and it continues to go up without you…
🙂
r
Hey Randy
I’ve never claimed to be omnicient! In fact, I go out of my way to let people know when something is only my opinion and not based on analysis.
yes, It looks like today is going to be a blockbuster – and, yes, we’re no in it.
So yes, annoying – but based on the information we had, and without relying on MSM opinions – we made the best decision we could.
So we have to get back in the market?
Great!!
h
Dear Heather,
Thank you for your weekly blogs as always. Please enjoy your summer vacation. We only live once and life is short. Cheers to life and ITM.
Sincerely,
George Henry
Thank you George!
Soooooo, does volume matter? What’s your conclusion?
Why doesn’t MACD work in bull markets, but does work in bear markets?
Hi Micheal,
as with most indicators volume works best in hindsight and with cherry-picked results. The rest of the time is is hit-or-miss as I have tried to show.
So to be brief: there is no definitive answer, it is just one of the many factors we can look at, which may give us some more information on the mood of the market, and it is wise to know its limitations.
Re the MACD in the bear but not the bull – bull and bear markets are two quite different beasts – one is not simply the reverse of the other. Bears are sudden and move faster which is why we use different get in / get out / get back in signals.
I am not wedded to any theory or faithful to particular indicateors. Everything is pragmatic choice; i have simply chosen the best combination of indicators and parameters on backtesting.
Hope this helps
h
Greetings Heather, I’m considering buying your ITM Strategy book. How is what you teach different from trading ITM LEAPS? Thank you
Ronald
HI Ronald
we don’t use LEAPS, but shorter term options depending on what level of the strategy we are doing and what the underlying ETF is.
We also have get in and get out signals, you can see the backtested results starting with $1k on the front page – here’s the link: https://heathercullen.com/
Hope this helps.
h
Hi Ronald, Seriously why wouldn’t you just buy the book and see for yourself? I mean, to write this instead of just spending the $A20 (odd) is really an insult to the author!