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mortiz

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I haven't gotten around to the message boards or financial news much lately, but did this weekend and am seeing calls for significant price declines due to the timidity in NYSE and NASDAQ volume during the current price bounce.  I am certainly open for another price low test attempt, BUT.... I don't think one can point only at low volume for the impetus behind any crash projections.

Reason: simple, it's the last two weeks of August and historically, the last half of August is accompanied by low volume the vast majority of the time.

Since there are more fun things to do on Labor Day afternoon, this will not be an exhaustive look a volume seasonality over the past 60 years or so, but let's take a look at the August volume tendencies over past several years.

Using the NASDAQ volume as the proxy (NYSE volume exhibits the same behavior in August), the blue curve in the following charts is derived by comparing the daily volume each day versus the NASDAQ volume 50 day moving average.  The daily volume percentage deviation from the 50 day MA is then smoothed using a 13 day MA yielding the average volume deviation over the previous 2.6 weeks.

First a look at volume tendencies using the aforementioned method since 2001.  In an attempt to determine average volume trends in the last two weeks of August, I have place red circles around the late August blue volume deviation curve and black circles at the corresponding price time frame.

In every case over the past seven years, volume over the last 13 trading days in August has been near or below 15% under the average volume over the previous 50 trading days.  Half of the cases shown in this time frame prices were in the midst of a decline, in the other half, prices were either coming off their lows or in the midst of an advance.

In each of the price decline examples, late August seasonably low volume surfaced within a few weeks of lows followed by robust advances. 



Let's check 1998 through 2000.  In these three examples, the late August volume was below average once again.  As in the 2001 through 2006 examples, we have a variety of ensuing price implications associated with late August volume tendencies. 

In 1998, the low August volume coincided with the first half of a "W" bottom price pattern, August of 1999 marked a grind from its lows, consolidation, then a very robust upmove, and in 2000, the low latter half of August volume coincided with the price high preceding a very nasty decline over the coming months.... so there is a precedent for low August volume resulting in a crash (2000)....  one out of nine years so far.



The final examples are 1994 through 1997.  In 1994, we had the first example over the past several years of NASDAQ volume actually about 10% above normal, which led to three months of price consolidation prior to a very impressive multi-month rally. Once again, no solid correlation between late August volume and prices going forward, two examples of ensuing price consolidation and two examples where prices rallied smartly following the late August volume doldrums.



Since the seasonally low volume tendencies of the second half of August doesn't provide us with consistency of price forecasts going forward, let's get off topic and look at a couple very simple indicators, one for sentiment and one for liquidity.

First, a look at what the CBOE options players were up to during August of each year via the total (index and equity) put-call ratio, smoothed with a 30 day moving average.  Circled are the approximate late August time frames on both price (SPX) and the total CBOE put-call ratio.  To avoid the use of logarithmic and linear axes on the chart, SPX is used as the price proxy for this comparison.

Currently, the CBOE put-call ratio 30 day MA is at 1.20, matching its multi-year high posted in the spring of 2007.  Normally, one would like to see the put-call ratio roll over for a buy signal, but since the curve is a 30 day MA, high ratios sometimes coincide with price lows, unlike shorter moving averages.

Oh, that August 2000 price high that led to a devastating price decline over the next several months was accompanied by a put-call ratio of around 0.52, which is in the lower extreme of this indicator's range... far different from the current multi-year high we are seeing with this indicator.



Finally, let's take a look at the NYSE composite AD McClellan Summation Index (McSum) serving as our proxy for an intermediate term liquidity "velocity" measurement.  Once again, circles on the blue NYSE AD McSum curve designate the McSum configuration in late August since 1994.

There were three years, 1998, 1999, and 2007, where the NY AD McSum was in its negative extreme range during August.  Since the NY AD McSum is currently recovering from it most negative extreme since late July 2002, we could use the 1998 and 1999 events as possible guides in what to expect going forward.

In 1998, the first price low occurred in late August, and was retested in October with the AD McSum positively diverging.... characteristics we like to see for solid intermediate term price bottoms.  In 1999, the ultimate AD McSum low basically coincided with the late October price low. 

Although a very nice intermediate term price rally unfolded in late 1999/early 2000, the AD McSum could not get above +250... a dire warning sign there was not enough liquidity available for broad participation in the rally.  A similar McSum failure to break the important +500 level in the late 1998/early 1999 rally was even an earlier warning the great bull market of the 1990s was riding on the backs of far fewer stocks.

There is little correlation between the seasonably low volume tendency in late August and liquidity measures, just as with price.  McSum behavior accompanying price rallies in the coming months should be closely monitored to see if the NY AD McSum falls short of the +500 level.  If the McSum fails to achieve the important +500 zone, it will be a sign liquidity is drying up for whatever the reason.



A drive-by look at the latter half of August volume tendencies over the past few decades also suggest late August is overwhelmingly wrought with lower than average volume.  Thus when you see/hear various forecasters point at the low volume accompanying the price rally over the past couple of weeks, it may pay be skeptical of any future price prognostications based upon the low volume alone... it's just normal late August volume!!

FWIW

Randy
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