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Lighter the Volume, the Lighter the Trades?

July 20, 2017, 2:08 pm

One question that I get asked frequently at this time of year is how lighter volume in the summer vacation months affects an investor’s ability to trade. There’s no denying it has an impact, but that doesn’t mean you have to sit on the sidelines until the fall.

Volume is definitely a factor right now. The market is quiet even by summer standards, with turnover on the S&P 500 tracking at half of what it was early last July. We saw the real-world impact of that last Friday as weak trading volume held profits back at the big banks that reported earnings: JPMorgan Chase (JPM), Wells Fargo (WFC) and Citigroup (C).

But the market is still more than liquid enough to trade short-term positions. Lighter volume can accentuate price swings with fewer traders in the pool, and you can certainly take that into consideration. In a season where overall volatility is depressed, that additional movement can actually be your friend.

That said, I like it when upticks in buying activity signal charts that are ready to move. I prefer to use volume to confirm the price trends. With big bids more scarce at the moment, I haven’t seen a lot of baby bull trends beckon, which is why I will sometimes focus more on trading in and out of established long-term leaders. In those cases, volume isn’t quite as crucial as a confirming factor.

When I see the buyers come in around or after earnings as the reports start to roll out, those entries will open up all over the market as the volume bars spike. I know we’re all looking forward to that!

The silver lining is that there aren’t a lot of active sell signals around either. Rallies tend to start with a selling climax and end with a buying climax. Both have been extremely rare lately, but I suspect the next few weeks will provide plenty of hints in both directions.

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