Volume and the Big Lie

“We’ve had a massive decline over the past week and a half. We’ve had a reasonably massive advance in the last 2 days. We’ve done the advance here in the United States on lesser volume. That’s always disconcerting to me. The market should follow volume. Volume should be rallying as the market rallies. Volume should be waning as the market falls off. This time: volume increased dramatically on the decline, volume has waned on the last 2 days advance. I think it’s reasonable and wise to take some money off the table … and to use this rally to be short.” – Dennis Gartman, June 29, 2016

Pundits absolutely love using volume in support of a call. “Volume should go up when the market goes up and down when the market goes down,” they say. Simple.

Actual analysis supporting such statements? Nonexistent.

From the lows on March 9, 2009, we have endured these nonsensical prophesies for 1,848 trading days. During this time, the rolling-10-day returns for the S&P 500 ETF ($SPY) have been down more than 5% on 59 occasions and up more than 5% on 98 occasions.

The average daily dollar volume during 10-day declines of more than 5%: $33.7 billion.

The average daily dollar volume during 10-day advances of more than 5%: $21.7 billion.

Imagine that. Time and time again, we have seen higher volume sell-offs and lower volume rallies (on average, 55% higher volume during declines). And time and time again the market has gone on to hit new highs.

Is this action indeed bearish?

Only if you believe that the 264% gain in the S&P since the 2009 lows is bearish.


Only if you believe that strong forward returns on average are disconcerting.


Since March 2009, there have been 20 corrections greater than 5% in the S&P 500. There have been a myriad of “reasons” for these sell-offs (most recently “Brexit”) but they all had two things in common: 1) higher volume and 2) one pundit or another telling you to sell or short because of this ominous volume signal.


But why exactly is volume rising during corrections if not for impending doom? Maybe because market declines get much more attention than advances. Maybe because people panic and trade more when there is bad news in the headlines. Maybe because there’s increased volatility in the market which inevitably leads to increased trading among hedge funds and other professional traders/investors.

Whatever the reason, the evidence does not suggest that such an increase in volume is bearish. Nor does it suggest that a decrease in volume on a subsequent rally when bad news/volatility dies down is a cause for concern.

Now you know the big lie when it comes to volume. Why is it perpetuated? That’s another story for another day.

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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