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If it is true that a lasting rally needs volume, then we are pretty much running on fumes here. While the market’s spring rally has been impressive, the volume behind it has been anemic. For example, take a look at last year’s spring rally and you’ll see the same pattern: higher prices accompanied with lackluster volume (orange line). And again in July 2008, we had a shallower price move with very poor volume levels:
William Hester of Hussman Funds did a very good historical analysis of volume characteristics during important market bottoms: Comparing Bear Market Rallies.
But there is an important nature of volume that I don’t think he took into consideration. Everything else being equal, volume tends to be cyclical and follow a pattern. For example, it tapers off during holidays like Christmas and New Years (yellow squares on the chart). Volume is light from June to August - what is referred to usually as the summer doldrums. And it spikes for panic lows (you can see a few examples above).
This makes analyzing volume patterns very difficult because we have to adjust for the seasonality. In any case, it is not really justifiable to give the spring rally some wiggle room for this because it doesn’t overlap with any important seasonal volume changes.
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