Trading Volume Separates Bull Markets from Bear Rallies

One of the platitudes most constantly quoted in Wall Street is to the effect that one should never sell a dull market short. That advice is probably right oftener than it is wrong, but it is always wrong in an extended bear swing. In such a swing the tendency is to become dull on rallies and active on declines.
- William Peter Hamilton, The Stock Market Barometer (1909).
Volume tends to expand in the main direction of the trend. In a bull market, advances accompanied by increasing volume or declines on diminishing volume are taken to be bullish. Conversly, in a bear market, declines are accompanied by increasing volume and advances show diminishing volume. Volume should always be studied as a trend (relative to what has preceded).
- Richard Russell, The Dow Theory Today
The bottom is preceded by a period in which the market declines on low volumes and rises on high volumes. The end of a bear market is characterised by a final slump of prices on low trading volumes. Confirmation that the bear trend is over will be rising volumes at the new higher levels after the first rebound in prices.
- Russell Napier, Anatomy of the Bear (his study of the four great stock market bottoms of 1921, 1932, 1949, and 1982).
Whether it was William Peter Hamilton observing the trading activity of the 19th century, or Richard Russell who has studied the market's real-time price and volume action for more than 50 years, or Russell Napier who took the time for an in-depth review of the 4 greatest buying opportunities in the 20th century, each came to a similar conclusion: to confirm a change in market conditons, watch trading volume closely. By this measure, the market's recent rally still has much to prove.
The graphs below attempt to provide visual support to the idea that volume matters as a characteristic of a rally – especially one that is so widely annointed as the beginning of a new bull market. The graphs will hopefully also add to the comments John Hussman has made – including those in last week's Green Shoots over Thin Ice and December's Recogntion, Fear and Revulsion . Specifically, bear markets don't typically end in a crescendo of fear and panic, but more often on a feeling of “despair and disillusionment,” while strong bull markets tend to feature heavy trading volume.


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