During the last three months, we have seen steady declines in trading volume as the market went through the summer doldrums.
Historically, it’s not unusual to see volume decline in the summer, but during the last five or six years, the volume hasn’t really fallen off in the summer months. This year’s decline was noticeable as the volume in August was 30 percent lower than the volume in May.
Now that we are in September, we expect to see an increase in volume.
The question becomes, “Do the investors that were on the sidelines for the summer re-enter the market as buyers or sellers?”
In my opinion, the answer to this question will determine how we close out the year.
With the S&P facing resistance and approaching an overbought status on the weekly charts, an increase in buyers will be necessary to fight through the resistance.
If the increase in volume comes via sellers, we will see a decline in the S&P and the index would likely challenge the 1,000 level.
There are numerous ways to measure investor sentiment, but for me, trading volume is the ultimate sentiment indicator.
When volume is declining at the end of a rally, this tells me investors are growing weary of the rally. What better way to show your feelings toward a stock than actually pulling the trigger and buying or selling it?
The same can be said for the overall market.
One thing to keep in mind is that volume is a factor in a number of overbought/oversold indicators.
When you see drastic declines in volume like we saw this summer, the overbought/oversold indicators can be skewed in one direction of the other.
An increase in volume could move the oscillators drastically.
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