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What sluggish summer trading volume means for stocks
By Mark Hulbert | May 30, 2017

Does volume follow price, or vice versa? Or neither?

CHAPEL HILL, N.C. — Here come the summer doldrums. But that doesn’t automatically mean the stock market will struggle.

That’s important to remember as we return from the Memorial Day weekend and are confronted by predictions that low summer trading volume will be bad for stocks. The only group that has anything to fear from lower trading volume are the brokerage firms whose commission revenue will suffer.

To be sure, studying the possible impact of lower trading volume is tricky, since trading volume has steadily grown over the years. To overcome that long-term uptrend, I calculated for each month since 1972 a ratio of its New York Stock Exchange trading volume to average volume over the trailing 12 months. Sure enough, the average ratio for the months of June, July and August is nearly 5% lower than the average for the non-summer months.

You might think that this is all the proof we need of the bearish implications of low trading volume. Everyone knows that the summer months come right in the middle of the six-month seasonally unfavorable period that often goes by the name “Sell in May and Go Away.”

But, as I explained a month ago, this famous seasonal pattern actually traces to just the third years of the U.S. presidential term. In the other three years of the four-year term, there historically has been no statistically significant difference between the S&P 500’s SPX, +0.03% winter and summer returns.

So any apparent correlation between depressed summer trading volume and a disappointing stock market is just that.

In fact, if you think about, the alleged correlation between low summer volume and returns doesn’t even meet a simple smell test: September is the worst-performing month of the calendar, on average, and yet its stock-exchange volume is far higher than that of the summer months. Furthermore, October on average has even higher trading volume than September, and its performance historically has also been below that of the summer months.

I doubt that this will settle the matter once and for all, of course. Technicians have been debating for decades over whether price leads volume or volume leads price. And there are many competing econometric tests—beyond the scope of this column—that can be employed to detect a possible causal relationship between volume and price. Not surprisingly, not all them reach the same conclusion.

Nevertheless, in my review of the academic literature, I came across numerous studies that found either no relationship been volume and price or that volume follows price rather than the other way around. That at a minimum should give you pause if you were otherwise certain that low summer trading volume is automatically bad for stocks.

My advice? As the Wall Street saying goes, don’t sell a dull market short. There are plenty of things to legitimately worry about, but below-average summer trading volume is not one of them.

http://www.marketwatch.com/story/what-sluggish-summer-trading-volume-means-for-stocks-2017-05-30

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