Using traditional measures, volume has been falling since the '07 market top.  Using more comprehensive measures, market volume peaked during the '09 crisis and has fallen off since then, even as prices have risen.

The fact that volume is down and continues to trend negatively is no disputed fact.

What is disputed however is the importance of volume and if the declining volume on the back of the rally (VTI) since 2009 is meaningful or not.

Traditional Volume Rules

Traditional Technical Analysis teaches us a few key points:

     Rising volume on rising prices (SPY) is normal

     Volume normally leads price (SNP:^GSPC) during a bull move.  A new high price (IWM) that is not confirmed by volume should be regarded as a red flag

     Rising prices (DIA) and falling volume are abnormal and indicate a weak and suspect rally

Many media outlets however shrug off the weakening volume rally.  Recent articles include:

        "Volume Matters? Think Again" - Wall Street Journal

        "Is Low Volume Actually Bullish?" - Marketwatch

        "Is Low Volume Really Bearish?" - Schaeffer's Research

Volume No Longer Matters?

The main argument is, prices have risen since the 2009 lows although volume has been declining, therefore volume doesn't matter anymore.  This seems a little shortsighted to me. 

To assume something doesn't matter because at the present time the expected outcome is not occurring does not mean that the expected outcome won't eventually occur.  This is like saying it is sunny outside right now, so a thunderstorm won't happen later. 

Or if you prefer a financial analogy, the housing market has always gone up in price, therefore there is no risk of housing prices declining. 

Just because the market has risen on less and less volume, does not mean volume should be disregarded as unimportant or that price eventually won't correct back to historical norms.

Volume Should Decline as Price Rises?

A more solid argument is that volume should decline as share prices go up as the total dollar value traded (volume * share price) remains roughly the same.  It does make rational sense, and a good example is a stock split such as the one that occurred with Citigroup (C) on 5/9/11.

Previous to the split, Citi's price was in the low single digits and volumes were huge.  But after a 10-1 stock split it traded around $50 and volume declined significantly.  This specific case was actually a popular argument as to why volumes were down in 2011. 

But, if this is the reason for declining volume, then the average dollar value traded in the markets should be roughly the same through time.  Any change in price would be offset by change in volume.

But, this too is not the case, and history tells us so.

Introducing ETFGuide's TCT indicator

The below chart and analysis was created for the ETF Profit Strategy Newsletter subscribers on 11/16 and shows the Dow Jones Industrial Average (XLI) in red compared to our Total Capital Traded (TCT) Index in blue.  During the 1990's (label 1) and 2000's (label 2) bull markets until the Flash Crash of 2010, total capital traded followed the stock market's ups and downs (DJI:^DJI) very closely.  This was all healthy and normal.  Volume rose with price, as did TCT.

But something happened after the Flash Crash in 2010.  Markets kept rising although total capital dried up.  And drying up it continues as volume shrinks faster than prices rise. 

Notice also that the budget crisis in 2011 brought prices back in line with total capital traded on its quick 20% selloff.  Since then capital has again dried up, actually taking total capital traded back to late 1990's levels at under $10B/day.


With average daily TCT back below $10 Billion it is clear the market's rally since 2010 is abnormal and not built on normal supply and demand metrics.  This indicator is also potentially warning us that in order to bring prices back in line with demand, another big selloff, or Rogue Wave (article here), may be lurking around the corner .

The latest ETF Profit Strategy Newsletter includes a detailed analysis of various market forecasting tools, along with a short, mid, and long-term outlook for the U.S. stock market.