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Volume matters…that’s why I’m still on the sidelines

No doubt the market has been up the past six trading sessions.  But in this volatile environment I prefer to remain cautious.  I have several concerns about this market, the most elementary being- low trading volume on Up days and high trading volume on Down days .

2014 has been characterized by the majority of above average trading volume occurring on days when the market is down.  That’s known as “distribution” i.e., institutional investors are selling while they tell you to “buy & hold”.  A healthy market would be characterized by down days having significantly lower trading volume…an indication that less people are running towards the fire exit.

That’s why trading volume is such an important indicator.  Think of Econ 101 and the relationship between Supply & Demand.  If everyone wants your product, you raise the price.  If nothing is selling, you lower the price.

The stock market works in a similar way.  If more stocks are being sold at lower prices that indicates an enticement is being offered to find buyers.

As growth investors, we want to sell at a premium, not a discount.

The recent rebound has been weak in terms of volume.  All but one of the past six trading sessions have been below average trading volume.  Monday’s volume was the lowest trading day of the year (on both the S&P500 & NASDAQ).  That’s my concern.

Everything could change tomorrow, but for now I remain cautious and my portfolio mostly in cash.