What Does the Market's Low Volume Tell Us?

From Mark Hulbert:

To find out how worried we should be, I analyzed stock-exchange volume at the beginning of all bull markets since the early 1970s. I relied on the precise definition of a bull market that is employed by Ned Davis Research, the quantitative research firm, according to which there have been 10 bull markets since the mid 1970s.

For each of these bull markets, I calculated a ratio of two numbers: The first is average daily NYSE trading volume over the first six weeks of that bull market, and the second is the average over the six weeks prior to the bull market’s beginning (that is, in the last six weeks of the preceding bear market). I chose these six-week windows because that is how much time has passed since the early October lows.

Across all 10 past bull markets, this ratio’s average was 2.15 to 1. That means that trading volume was more than twice as high in the first six weeks of the average past bull market than in the six weeks of the preceding bear market.

How does this compare to what we’re experiencing today? The ratio of average daily trading volume in the six weeks since the October low to the average in the six weeks prior to that was 1.87 to 1 — 13% lower than this ratio’s average and lower than the minimum this ratio has been at the beginning of any of the last 10 bull markets.