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FRED GOODMAN'S KEY INDICATORS FOR
INVESTMENT SUCCESS
Each day has a distinct pattern of volume when compared to the average for the previous 5 days. For example, Thursdays over the last year have been 3.5% above the 5-day average, while the price change has been 4.5% larger than the average change. Wednesdays have displayed an even a higher average volume, but a much lower price change. All of this made me wonder about the weekly volume in general. Has the volume over the recent rally and stagnant period been high or low relative to the volume over the last several years? It is difficult to relate present volume to past volume since the tendency has been for daily volume to increase steadily over the last half century and beyond. I remember when I first became interested in the market a 5 million share day captured the headlines -- it was that rare. Now we are calling 1.3 billion low. This chart illustrates the steady climb of the 12-month average volume since 1996. Notice in particular, how the 12-month average volume suddenly rose, just after May 29, 2002 when the Dow started dropping in earnest. Also note how it suddenly started to decline starting on June 18, 2003, just 2 days before the Summary Index produced its sell signal. It is clear that volume has been declining over the last month. The average is now equal to 1.389 billion shares, down from 1.440.
One way to compare the 5-day average volume to that found years ago is to compare the 5-day average to the 12-month average, and determine if it is higher or lower, and by how much. That is what I have done in the chart below. The blue line represents the percent that the 5-day average exceeds or lags the 12-month average. Notice the two arrows pointing down on the left side of the chart. They indicate volume surges -- the 5-day average calculated on those days exceeded the 12-month average calculated on the same day, by 45% and by 68% respectively. Specifically, on July 21, 1997, the 5-day average was 706 million while the 12-month average was 420 million, a difference of 68%. The Dow around that period had rallied from 7500 over the previous 5 weeks and stood at 8259 two weeks later, and that was the high for the next 6 months! Next look at the volume during the next big advance, in March and April of 1998. Then, the volume was relatively quite small, and it never again reached the heights that it had enjoyed during the rapid climb in 1997, except at the bottom of the two massive declines that followed in 9/11/01, and last July. So, sustained periods of increasing volume are found during major bull market advances, at least based on this one example, and I will go back further to verify this finding. Based on the low volume that occurred during the big rally in 1998, one can in retrospect understand the big decline that followed it. Perhaps low volume during a major rally is a sign of bad things to come. (See now, for example.) The arrows at the bottom of the chart correspond to the periods between Christmas, and the reopening of the market after New Year's. For some odd reason this did not happen in December of 2000, but it did for the other 6 years displayed. These low volume periods can be ignored.
Now what about the present? For all of 2003 the 5-day average volume has been subdued when compared to the moving average of 12-month volume. Not only that, but the trendlines I have drawn illustrate that the volume tops have been declining since the rally following the July 2002 decline. The peaks have occurred at the start of each rally since the July bottom, but they have been getting smaller and smaller. My preliminary conclusion is that we are not going to see an important rally until the volume increases markedly from present levels, and a good way to determine if the volume is increasing, is by comparing the 5-day to the12-month average.
Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via email at Fred@MarketMonograph.com. The charts and commentary represent what Fred is thinking about the market and thinking of doing for his own account and for accounts he manages. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information. 
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