The SPX just had its first down week in the last ten, and numerous tweets have popped up in my feed about the declining volume over the course of the rally.
So, does volume matter? Yes, and a lot. When analyzing trends, there are three things that matter the most: price, volatility and volume. Volume acts as trend confirmation and potential early warning sign.
On June 20, 2018, I commented CNBC's Michael Santoli's tweet on Netflix. It was obvious that the parabolic nature was not being confirmed by volume. That's not to suggest Netflix wouldn't continue higher, but it was a warning sign.
One day later, Netflix's volume metrics began to roll over, such as the 7-day rate of change in daily volume. The result: a former all-time high and 26 percent decline.
It happened again in October, when I suggested to subscribers that high-beta equities are a no-no. The result: a 39 percent decline.
We can apply volume analysis on indicies, too. Take for example, the SPDR Dow Jones Industrial Average ETF (DIA). On September 19, 2018, I kindly pointed out that as the DIA was approaching a new all-time high, the rate of change in volume was drastically declining.
The index would make an another all-time high on the lack of activity 10 days later, but it would then crash 19 percent through Q4-2018.
It can be kind of tricky when discerning how to approach volume. Due to the massive financial engineering of corporate buybacks - now outpacing CAPEX for the first time since 2008 - there are less shares available.
It's common for prices to drift higher on low or declining share volume and ramp up as everyone rushes to the exit. However, adding a simple tools like the rate of change in volume, you can be one of the first out the door.
Social and legacy financial media glorify the "called the top" mantaily. The probability of you selling the top-tick in the trend inflection is slim-to-none. It's all about truncating drawdowns.
Volume, it does matter.