Trading Volume

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The Next Five Minutes

Thanks to Deron Wagner for permission to use the following information on trading volume for this blog post.

Trading Volume Required
For Stocks & ETFs

I will start off with two forms of trading volume analysis and trading volume definition.

Average Daily Trading Volume (‘ADTV’), a trading volume indicator, is a measure of the number of shares traded per day, averaged over a period of time (say 50 days).  It helps traders assess the liquidity of a stock or ETF.

You can easily enter and exit the market without directly influencing a stock’s price, when it is highly liquid.  Conversely, you will know which securities are too illiquid to trade.

ADTV also helps identify institutional accumulation, denoted by spikes in volume.  If a surge in volume also comes with a significant gain in price on the day, that is a sure sign that banks, hedge funds, mutual funds, and other institutions are behind the stock.

ADTV is irrelevant, if you are planning on buying only 100 shares of a stock, because such a small position can easily be liquidated, even if the stock is thinly traded.

However, 5,000 shares is a different matter.  You will need to ascertain the degree of difficulty in eventually closing out the position with minimal slippage and volatility.

Average Dollar Volume (ADV), another trading volume indicator, is derived by multiplying the share price of a stock times its average daily trading volume (ADTV).

ADV is more important than ADTV for institutional traders and investors who make big trades.

For most traders, an ADV of 20 million or greater is sufficient liquidity.

For someone with a sizeable account trading a large position size, an average dollar volume above 80 million would be considered to be extremely liquid.

You can lower the minimum ADTV requirement for a stock, if the stock is trading at a higher price, once you know the ADV.

How long do you hold?

This depends on whether you are a day trader, position trader or swing trader.  This will dictate your trading volume requirements.

A day trader who scalps for tiny 10 or 20 cent gains should trade stocks where millions of shares change hands per day – highly liquid equities with tight spreads.

Conversely, a position trader who holds stocks for a number of months can get away with trading much thinner stocks, given positions can be scaled out of over several days or weeks.

Concerning ETFs (exchange traded funds), average trading volume levels are not terribly important – this because ETFs are open-end funds.  As required, shares (new units) can be added to the mix or redeemed.  Accordingly, supply and demand issues have little impact.

Bid and ask prices continue to move in tandem with the market value of an ETF, even if there are no buyers or sellers for an ETF for several hours.  This is because the market value of an ETF is constituted from the prices of individual stocks underlying the ETF.

This means that you should not be as concerned about the average trading volume of an ETF, as you would be with an individual stock.

It should be considered that ETFs with a low ADTV can have wider spreads between the bid and ask prices, even though liquidity is not a major concern when trading ETFs.

To get around this, use limit orders.  This is not an issue, if you trade for many points, not pennies; occasionally paying up a few cents should not be a concern.

It’s a different matter with stock volume.  ADV and ADTV are important considerations in determining the liquidity of a stock.

For individual stocks, depending on the share size of the position, Deron Wagner generally looks for a minimum ADTV of 100,000-to-500,000 shares but, in the case of ETFs, he may go as low as 50,000 shares (to effect greater asset class diversity).

How to Determine the
Liquidity of a Stock/ETF
(Trading Volume Analysis)

There are free sites that provide you with the Average Dollar Volume and/or ADTV of stocks.  But, according to Deron, the best and fastest way to analyze how liquid a stock is is to plot the stock’s data on a chart of the stock on a good trading platform.

Below price action on the chart, you would plot daily volume bars and a 50-day moving average of volume, which would show the continually updated ADTV (average daily trading volume) of the stock.  Below that, you would plot the Average Dollar Volume of the stock (price X average volume), which would also appear as bars.

An example of a highly liquid stock would be one with an ADTV of say five million shares and an Average Dollar Volume of 315 million.

When it comes time to close out trades, paying attention to the ADTV and/or Average Dollar Volume of stocks prevents surprise price reactions.  This ensures that there is sufficient liquidity to ensure that trades don’t directly affecting the stock prices.

A more accurate and complete picture of a stock’s liquidity is achieved with Average Dollar Volume – more so than just ADTV.

The average daily trading volume of a stock should be of little concern, unless you have a sizeable trading account.  Otherwise, your individual trades will usually have minimal, if any, effect on price.

It is more important to focus on active stocks.  You might get away with thinly traded stocks, if a company historically reports stellar earnings growth, or has a revolutionary product that is selling like hot cakes.  But, allow for greater price volatility by reducing your share size.

Investopedia (More on Trading Volume):

Potential ReversalA lack of interest is reflected in decreasing trading volume and increasing price. 

A reversal is also indicated after a prolonged price movement lower or higher, if price starts to range with no appreciable price movement on heavy volume.

Changing FundamentalsLittle trading volume, accompanied by a price drop (or rise), does not make for a strong signal.  A strong signal comes in the form of a decline in price (or increase) on large trading volume, signalling a fundamental change in the underling stock.

End of a Trend:  What does it look like?  Potentially, a sharp increase in price and trading volume gives the appearance of a trend ending.  This is because laggards who missed the move pile on at market tops, flushing out remaining buyers.  At the other end of the spectrum, traders exit en masse when prices fall.  This results in volatility and even more volume.  After the spike in these situations, we then see trading volume taper off.

BullishnessImagine this scenario – price declines with increasing trading volume.  Price then moves higher, but then reverses once again, and goes back lower.  The important thing to watch here is… on price’s move back down lower, if it remains higher than its previous low, and trading volume diminishes on that second fall-off, this can be seen as being bullish.           

Reading Volume on a BreakoutIncreasing trading volume on a breakout from some chart pattern or a range is reflective of a strong move in the works.  Conversely, anaemic or diminishing trading volume on a breakout is indicative of waning interest and the possibility that the breakout will turn out to be false.

You will find three trading volume indicators that might interest you in the Terms That Matter section by going there when you get a chance. 

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Stocks to Die For

In this section, be they commodities, currencies, stocks or other asset classes, I bring you the very best investing/trading opportunities, based on my own extensive/intensive research and my own trading.  These are suggestions for your consideration – not recommendations.  Please use caution, and proceed at your own discretion – only investing/trading with money that is not destined for personal living expenses.

I have done all the homework for you – analyzing the technicals, time frames, and underlying fundamentals.  I immediately discard stocks that have sloppy chart patterns, or have inconsistent growth over at least one year – perhaps two.

By all means check out these opportunities further, but study them closely before hitting the enter key on any trades.  If you would like further input from me, or have any questions, simply contact me using the Contact link on the site.  I am here for you, and would love to hear from you.

Where I have skin in the game, I indicate that.  Obviously, you can check out the efficacy of my picks by using free charting services, like BigCharts.com and StockCharts.com.

For each stock mentioned below, I answer the question, “What is the volume of a stock?”

Kinaxis (KXS) is an Ottawa-based subscription software firm, which went public in June of 2014.  It has since delivered strong revenue growth and share price appreciation – and a valuation that has placed it at or near the top of its North American peer group.

Kinaxis, which provides sophisticated supply chain management software to significant global companies, is enjoying quite the ride.  Even though its daily stock volume is relatively low, as trading volume goes, its stock price has grown steadily from the CAD$13 per-share offering price on the TSX to $44.86, November 11/15.  U.S. investors snapped up almost half of its $100-million IPO.

According to Thanos Moschopoulos, BMO Nesbitt Burns Inc. analyst, that puts it at nine times the ratio of enterprise value to this year’s expected sales, as compared with North American public subscription software firms that have similarly high margins and come in at an average of 7.2 times.

This all adds up, if you take into consideration its strong competitive position, marquee customer list, high customer retention, and strong profitability.

Kinaxis is almost at a revenue run rate of $100-million annually.  Third quarter came in at $23.7-million – up 34 per cent year-over-year.

I am looking for an entry point, but this stock continues to exhibit strength in the uptrend.  I always buy weakness in an uptrend, when MACD goes oversold (not necessarily below the waterline), and then punches up through its trigger line.

I follow the ‘Golden Rule,’ which calls for buying the dips in an uptrend.  This rule has been around since the earth cooled, or so it seems.  If you buy into strength, you run the risk of getting stopped out, and you pay more for the stock.  Why pay more, when you can get it for less?  Just play, ‘follow the leader’ – the leader being MACD.

Trading Volume:  Light

CA:  ATD.B Alimentation Couche-Tard Inc. Cl B (TOR)

I bought November 4/15 at 59.77.

With more than 16,000 stores across Canada, China, Europe, Indonesia, Japan, Mexico, and the United States, Alimentation Couche-Tard Inc., aka Couche-Tard, is one of the largest company-owned convenience store operators in the world.

Couche-Tard acquired The Pantry, worth $860-million (U.S.) in March, adding 1,500 stores in the United States.  The transaction had an enterprise value of $1.7-billion, including debt.

A leader in the Canadian convenience store industry, Couche-Tard is also the largest independent convenience store operator in the U.S. – i.e., in terms of the number of company-operated stores.

Couche-Tard has 7,987 convenience stores throughout North America, with 6,556 stores offering road transportation fuel. 

Couche-Tard is in the Baltic countries and Scandinavia, where they are a leader in convenience store and road transportation fuel.  They also have a significant presence in Poland.

In Europe, Couche-Tard operates a broad retail network across the Baltics (Estonia, Latvia and Lithuania), Poland, Russia, and Scandinavia (Denmark, Norway and Sweden).  The majority of its 2,229 stores offer convenience products and road transportation fuel.  The others offer road transportation fuel only, and are unmanned.

Further, independent operators operate about 4,700 stores under the Circle K banner in 12 other countries or regions worldwide (China, Guam, Honduras, Hong Kong, Indonesia, Japan, Macau, Malaysia, Mexico, the Philippines, the United Arab Emirates and Vietnam).  This brings to more than 14,900 the number of sites in the Couche-Tard network to more than 14,900. 

Couche-Tard recently reported a higher second-quarter profit, and increased its quarterly dividend by 1.25 cents to 6.75 cents per share.

Couche-Tard is riding on the back of the strengthening U.S. economy.  It is “the right company in the right place at the right time,” according to Desjardins Securities analyst Keith Howlett – as reported in The Globe and Mail, November 26/15.

Hot-Off-The-Press:  Couche-Tard announced that it has acquired Ireland’s leading operator of convenience stores and gas bars (the Topaz chain), thus making further inroads in Europe.

It is professionally managed, and has a well-situated convenience and fuel network, which includes quality forecourts and stores and an excellent food offering.        

The acquisition includes Topaz’ recent take-over of the Esso network – this added to Topaz’ already 464 fuel stations in Ireland.  Included is a commercial fuels operation, which has two owned terminals and 30 depots.

(Thanks to The Globe and Mail, Dec. 3/15 for this update.)

Couche-Tard is known for its ‘smart’ acquisitions and for being an effective integrator, but they favour profitability over store count.  Growth is in their DNA.

Trading Volume:  Light

I am also into JetBlue (JBLU) – JetBlue Airways Corporation, stylized as jetBlue – an American low-cost airline and the 5th largest airline in the United States.  I am in at 26.29.  This stock follows my paradigm – always buy a stock that is in a sustained uptrend (momentum).

All those buyers over a significant period of time (I like at least a year, two is better) can’t be stupid.  Again, I apply the ‘Golden Rule’ – always buying the dips in an uptrend.

I believe that all worldly forces at play are reflected in the price of a stock.  Unless you are going to devote a lifetime to becoming an uber-fundamentalist, who understands balance sheets, P&Ls, etc. to the nth degree, you will never know all the reasons why a stock is going up or down.  Even diehard fundamentalists sometimes get it wrong. 

So, just follow the crowd – but, within reason.  When everybody else is selling (taking profits) – in an uptrend, of course – you’re buying.  But, you’re buying on the coattails of the uptrend.

Isn’t it Newton’s Law – inertia being the tendency of an object to remain in motion or at rest? Newton’s First Law of Motion claims that an object will stay at rest, or move at a constant rate of speed in a straight line, unless an unbalanced force acts upon it.  Thanks to Study.com for that clarification.

Trading Volume for JetBlue:  Heavy

Another popular airline is HA – Hawaiian Holdings Inc. (Nasdaq):  They are the number one on-time carrier for the past 12 months.  Another one I like is ALK – Alaska Air Group Inc. (NYSE), the seventh largest airline in the United States.  I missed the explosive run on this one December 4/15.  I was more focussed on the resistance level at approximately the 82 level, and failed to pay heed to MACD, which has been trending up nicely since October 26/15, or thereabouts.  Trading volume on both stocks is light.

DHI – D. R. Horton Inc. (NYSE):

D.R. Horton is the largest home construction company in the U.S.

D. R Horton stayed in a large trading range mostly between $17.50 and $25 for almost two years. It then rallied above this range to signal renewed investor interest and the start of a new up-leg. During the recent market sell-off, the stock pulled back to support near its moving average and the rising trend-line.  It now appears ready to resume the up-trend.  Only a sustained decline below $28 would be negative.

This commentary courtesy Monica Rizk and Ron Meisels in The Globe and Mail, November 14/15.  I included it because I have been following this stock recently, and would be interested in buying some, when the recent market pull-back dissipates.  Update:  I bought in at 32.04 November 19/15 at the close.

It should be noted that Horton is building lower-priced homes, which augers well for company growth and stock price appreciation.

The 50 EMA is trending up above the 200 EMA, which is also trending up.  These EMAs and price have all been trending up for at least the past year.        

Trading Volume for D.R. Horton:  Heavy

CA:  BYD.UN Boyd Group Income Fund (TOR):

Boyd Group Income Fund is an unincorporated, open-ended mutual fund trust based in Canada. The nature of the company’s business is it owns and operates auto body and auto glass repair facilities and related services throughout Canada and the U.S.  The company also operates an auto glass replacement and repair referral business with glass provider locations and emergency roadside services provider locations throughout the U.S.                                

For over two years, Boyd has come in with very strong organic growth every quarter.  According to Mark Petrie, an analyst with CIBC World Markets, it has the capacity for acquisitions without diluting unit holders.  His target for the stock is $72.  The average target amongst analysts is $68.72.

Watch for a pullback.  The stock gapped up November 11/15.  I would look for MACD and price to weaken before considering a buy on this one.  MACD doesn’t have to go below the waterline, but I always look for a buy signal – MACD punching up through its trigger line, after going oversold.  Another way of playing it is, if MACD is already trending up, to buy when MACD bounces off its trigger line. 

The trading volume for Boyd is light.

For investors/traders who are not interested in dealing with foreign exchange (forex) accounts), they may wish to consider U.S. dollar ETFs, which allow them to gain exposure to the USD (U.S. Dollar) currency.  One to be considered is Bloomberg U.S. Dollar Bullish Fund (USDU).

Trading Volume:  Light

SPDR® Gold Shares (GLD)Now, I am not suggesting you rush out and buy these shares.  I am just bringing them to your attention, in case you have an urge to participate in the gold market at some point, when prices turn around. 

This ETF was originally listed November of 2004 on the New York Stock Exchange, and traded since December 13, 3007 on NYSE Arca.  It is billed as the world’s largest physically-backed gold exchange traded fund.

These shares also trade on the The Stock Exchange of Hong Kong, the Mexican Stock Exchange (BMV), Singapore Stock Exchange, and Tokyo Stock Exchange.

Trading Volume:  Light

CPB – Campbell Soup Co. (NYSE)It has consistent price upward momentum over the past five years, which is what I look for (two years is nice, one a must).  However, I would only be a buyer when price exhibits weakness (becomes oversold), and MACD similarly declines, reverses, and punches up through its trigger line.  It’s called, ‘buying the dips in the uptrend (The Golden Rule of trading).  Another way of trading this one would be to look for a bounce of MACD off its trigger line, as mentioned under CA:BYD.UN – Boyd Group Income Fund (TOR) above.

According to The Globe and Mail, Campbell Soup beat estimates for its fiscal first quarter, and raised the outlook for its full-year profit.

Trading Volume:  Light

SBUX – Starbucks Corp. (NASDAQ)I bought December 4/15 at 61.33, with MACD oversold at the waterline and turning, price advancing and the 200 EMA trending up consistently over the past five years.  I am looking for another entry point.

This is the largest coffee house company in the world, which has 23,132 stores around the world, including 12,937 in the United States alone.

Trading Volume:  High

XLY – Consumer Discretionary Select Sector SPDR ETFI bought in at 79.46.  According to SectorSpdr.com, this group includes industries such as apparel, automobiles and components, consumer durables, hotels, restaurants, leisure, media, and retailing.  Also included are Comcast, McDonald’s, and Walt Disney Co.

Trading Volume:  High

Not to mention I have a whack of money invested in the S&P 500 itself – not chump change.  Lots of skin in this game.

In the spirit of full disclosure… I am also into RAI – Reynolds American Inc. (NYSE) – in at 46.93.

Square is not making any money.  Nothing exciting about earnings or profit at Twitter yet.  Twitter doesn’t excite me either.

If you’re looking for further information on stock volume, you’ll find more details in my opening presentation on trading volume at the beginning of this post by clicking here

Hear ye!  Hear ye!
Stocks vs. Bonds

In 1924, Edgar Lawrence Smith published his sensational book, ‘Common Stocks as Long Term Investments.  His basic premise was that stocks would continue to beat bonds for two reasons:  a) they were less subject to inflation eroding their value, and b) they facilitated investors sharing in the growth of the U.S. economy – bonds and other assets not so much.

Major scholarly studies in 1938, ’53, ’64, and ’76 have reached the same conclusion.  Even taking into account the dire experience of the early 1930s, stocks have proven to be a great long-term investment – their returns far-exceeding those of bonds.

In 1994, Jeremy Siegel, a professor of finance at the University of Pennsylvania’s Wharton School, published the most influential of the stocks-vs.-bonds studies yet – ‘Stocks for the Long Run.’  In it, he laid bare the records of bonds and stocks as far back as 1802.  He concluded that, over those two centuries, stocks won handily for virtually every 30-year period.

By long run, he means, say 20-30 years.  Siegel’s basic argument hasn’t really been discredited – stocks is the place to be over the long-term – lots of trading volume for traders of all persuasions.

As reported in Time, June 15, 2009.

Gold anybody?

Gold will only get worse, if the U.S. dollar appreciates in response to any rate hikes that the Fed initiates.  If you just have to own it, make sure it is funded in non-U.S. dollars – currencies that are falling.  Avoid gold miners.  You can follow it as GDX, Market Vectors Gold Miners ETF.

Growth Now or Later?
Which do you want?

Courtesy Scott Barlow, The Globe and Mail, November 5/15

A profitable way to invest over the long term is to have a focus on low stock valuations.  But, they’re not much use at all over any time period less than 10 years,

In famed value investor Charles Brandes own words (paraphrased), “We pay in time what growth investors pay in valuations.”  Translation:  Growth investors typically pay high price-to-earnings ratios in order to realize immediate earnings growth.  Value investors, on the other hand, usually buy stocks on the cheap, and have to wait a very long time for their investments to appreciate.

The principles of trading volume at the outset of this blog post remain the same, whether you are trading for growth, momentum or value.

A Boring Index Fund
or a Manhattan Condo?
Which do you want?

As reported by City Realty (courtesy Bloomberg News) November 5/15 in The Globe and Mail, the value of a Manhattan condo over the past decade increased some 55 per cent, coming in at a compound annual growth rate of 4.5 per cent.  Compare that to the 5.4 per cent rise in the S&P 500 over the same period.

Forex Trading at Its Best
Tallinex Forex Trading

If you missed my presentation on the forex in my last blog post, please take the time to give it a read here.  You don’t have to worry about trading volume with the forex.  It is liquid all the time – six days a week, 24 hours a day. 

Join me at Tallinex Forex Trading – where you will find upwards of 1:1000 leverage.  That’s not a typo.  At that forex broker, you will be able to trade currencies better, easier and faster on any platform.  And, you can ask for my help at any time.  I have been with the forex for ~15 years, which means I am fully conversant with that market. 

Go to Tallinex Forex Trading and enjoy:

  1. MT4
  2. Free signals
  3. Raw ECN spreads
  4. Managed accounts
  5. Mobile and tablet apps

If you are amazed, I wouldn’t be at all surprised.  That’s as good as it gets.  Join me at Tallinex Forex Trading to rock your FX trading.  You can trade to your heart’s content all week long around the clock.  Sorry, no trading from late Friday afternoon till late Sunday afternoon.  Time to rest on Saturday.

If you need help, or have any questions, just get a hold of me here.  I would be elated to hear from you. 

Again, give it a go at Tallinex Forex Trading.  You will be pleasantly surprised.  Check out the features below:

Screen shot of the 11 features of the Tallinex broker platform for trading the forex.

(Make sure your country of residency allows you to trade with this broker.)

Currency Alert
(Eff. Fri. Nov. 20/15)

As can be seen in the COT (Commitments of Traders) graphs below for the Australian dollar, the commercial traders (Big Dogs) are going longer (orange line trending up over to the right in the top graph, elongated vertical bar over to the right in the bottom graph).  Translation:  expect continued strength in the Aussie and upward price action in both the forex and futures markets.  Trading volume is usually shown on most commodities futures charts.

Screen shots of commitments of traders (COT) charts for Australian dollar.

Commodities Futures Update
(Coffee Eff. Fri. Nov. 27/15)

Coffee is one of the most actively traded commodities in the world.  According to the latest commitments of traders report (COT) below, the commercial traders are extremely long this commodity (orange line in the graph) versus the hedge funds (green line).  This augers well for price to continue to advance from here.  This notion is supported by the fact that MACD has flashed a buy signal by punching up through its trigger line from below the waterline.  Again, trading volume is usually shown on most commodities futures charts.

Screen shots of commitments of traders (COT) charts for coffee.

Did you know?

The CME Group handles three billion contracts worth approximately $1 quadrillion annually, making it the world’s most diverse derivatives marketplace.

Eurodollars, Fed funds and U.S. Treasury all clear the CME Group.  It is the home of the USD market.

It offers unrivalled depth of liquidity in futures, options, OTC contracts and swap futures, with strong growth in the firm’s exposure in interest rate futures.  Talk about trading volume.

(Courtesy CMEGroup.com)

Trading Hack
(Stock Shock)

A profitable trading strategy is to buy stocks after a terrorist act, as we have seen after the attack in Paris Friday, November 13/15.

Since 1979, stocks have been down for five days on average, following the event, but ended up higher 10 days later.

In a more severe situation, like 9/11, the effect was more dramatic but, even then, the Dow was higher three months later.

Acts of terrorism don’t seem to have a lasting impact on the economy and markets.

The lesson to be learned here is to buy weakness when fear is high – more specifically, buy when the news first hits, and there is that immediate reaction to the downside.  Such outcomes are usually of short duration.

(Source:  Adam Shell, USA TODAY, Friday, November 20/15) 

You may see fluctuations in trading volume during such events.

Market Update

In an inverview on CNBC November 17/15, Nouriel Roubini said he sees the chances of a U.S. recession as being very low.  He foresees a Fed funds rate of 1.255 by the end of 2016, with the Fed raising rates very gradually.  And, he calls for a ‘bumpy landing’ for China.

Roubini is an economist.  He teaches at New York University’s Stern School of Business, and is chairman of Roubini Global Economics, an economic consultancy firm, which he founded.  He is influenced by John Maynard Keynes, Jeffrey Sachs and Hyman Minsky.  He was educated at Harvard, Bocconi University, and Hebrew University of Jerusalem.

The five-year gain of the S&P 500 stock index was about 11.7 per cent annually as of November 19/15.

October was the best month for U.S. stocks in four years.

According to David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, retail investors are showing confidence, which suggests that the rally is more than just short covering.  Marking the largest inflow in six weeks, investors poured US$14.6-billion into equity funds during the week ending October 28.

As reported in The Globe and Mail, November 18/15 there was a big leap in the number of fund managers overweight equities in November – this according to a survey conducted by Bank of America Merrill Lynch.  The same survey also identified that fund managers overweight cash fell to their lowest level since July.

Four-fifths of those surveyed said they expect the benchmark interest rate to be increased in December.  However, the survey results suggest that investors are nevertheless in a mood to buy stocks again, and have regained some appetite for risk – after the love affair with equities took a hit in August and September.  We saw a huge spike in trading volume in August.

Another sign of bullishness is the steep rise in the number of fund managers who expect the global economy to strengthen in the next 12 months. 

The Santa Claus Rally (Don and Jon Vialoux, The Globe and Mail, Nov. 30/15):  Since 1950, the strongest month of the year for the S&P 500 Index has been December.  The average gain per period has been 1.67 per cent, with gains 75 per cent of the time. 

Similarly, the strongest month of the year for the S&P/TSX Composite Index has been December.  During the last 27 periods, the average gain per period has been 2.3 per cent, with gains 87 per cent of the time.

Typically, from early December to early March, the S&P 500 Index is overshadowed by the S&P/TSX Composite Index.  During the past 20 periods, the average outperformance per year has been 3.0 per cent.

As reported in my last two blogs available here and here, I am heavily invested in the S&P 500, and have also put some money into the Consumer Discretionary Select Sector SPDR ETF (ETF) – XLY for short – because consumers are in a spending mood – at least when it comes to automobiles and housing.

If you missed my dissertation on the CBOE’s market volatility index (VIX) and its relationship to the Fed decision to go or no on a rate hike, you can catch up here.  The VIX plunged 42% in October. 

The VIX is usually high leading up to a Fed decision on rate hikes, if there is concern that they might go ahead and pull the trigger.  So far, for the last two Fed meetings in September and October, the VIX has been tame, following volatility – no rate hike accordingly.

So, where to from here for rates?  Well, the next meeting is December 16 and 17/15.  The Fed is getting more confident about the outlook, meaning they could possibly be in a mood to move on rates – this despite rather tepid headline GDP growth, even though Q3 GDP was revised higher.  On the other hand, U.S. private domestic demand is above three per cent annually.  I will keep an eye on the VIX, as we get closer to the upcoming Fed meeting.

The equity market is in a strong seasonal period, which typically lasts through the early spring.  The cycle could be in its later stages.  The six-year long rally in global assets has produced great returns, but the unrelenting bull market may be in for some weakness ahead.

That said, I am a pure market technician.  I will rely on what I see in the charts before I make any decisions on where the market is going.

Trading volume thus far has been pretty steady, except for the spike in August.

Terms That Matter

According to MetaStock, On Balance Volume (‘OBV’) represents a running total of trading volume, tying trading volume to price change, and is classified as a momentum indicator.  Joe Granville originally developed it, and he presented it in his book, ‘New Strategy of Daily Stock Market Timing for Maximum Profits.’

Using an arbitrary number to begin with, trading volume is added on a higher market finish, or subtracted on a lower market finish.  The result is a running total that highlights those stocks that are being accumulated.  Also, it can show divergences, as in the case of rising prices, but trading volume increasing at a slower rate, or even starting to fall.  (Investopedia)

Chaikin Money Flow (Investopedia):

Given that rising prices and trading volume should go hand-in-hand, this formula works with expanding trading volume, where price ends up in the lower or upper portion of its daily range.  It then attaches a value to the corresponding strength.  With closes in the upper portion of the range and trading volume expanding, values are high; with closes in the lower portion of the range, values are negative.

Chaikin money flow is most commonly used for spotting divergence but, because it oscillates, it can also be used as a short term indicator.

Klinger Volume Oscillator or Klinger Oscillator (KO or KVO):

(Thanks to matadewa0999.blogspot.ca and PositiveTerritory.com.) 

Stephen J. Klinger developed this indicator to assist both long-term and short-term analysis.  He did so after researching the topic of trading volume, based on works by such market luminaries as Marc Chaikin, Joseph Granville, and Larry Williams.

This is a price-and volume-based indicator, which is intended to measure both long-term and short-term money flow trends into and out of a security based on trading volume, while at the same time identifying short-term bottoms and tops.

Investopedia:

Variations above and below the zero line are useful when used in conjunction with other trading signals.  The Klinger volume oscillator adds together the trading volume of accumulation (buying) and distribution (selling) over a period of time.  Most indicators are more accurate when used together with other signals. 

Volume-by-Price (StockCharts.com):

Based on closing prices, Volume-by-Price is a trading volume indicator showing the amount of trading volume for a certain price range.  The bars appear on the left side of the chart and are horizontal.  They correspond with those price ranges.  In order to separate down-volume and up-volume, these bars can be viewed as a single colour, or with two colours.

This indicator can identify high-volume price ranges as support or resistance markers by combining closing prices and volume.  At StockCharts.com, twelve Volume-by-Price bars are shown by default, but this number can be decreased or increased as desired.

Understanding Bond Yield as per Investopedia:  The yield is 10% ($100/$1,000), if you buy a bond with a 10% annual coupon and a par value of $1,000.  In this instance, the bond’s yield is its par value divided by the interest pay-out.  The yield would go up to 12.5%, should the bond go down to $800.  The logic here is, you achieve the same guaranteed $100 on the bond that is now worth $800.  In sum, the yield of a bond and its price have an inverse relationship.  Bond yields fall, as prices rise.

NBIt should be noted that, short-term bonds are less vulnerable to rate increases than long-term bonds.  This is an important consideration, given all the conjecture around the Fed’s on-going deliberations about raising rates. 

Inverted Yield Curve (again courtesy Investopedia):  A situation where short-term debt instruments have a higher yield than long-term debt instruments of the same credit quality.  Of the three main curve types, this type of yield curve is the rarest.  It is considered to presage an economic recession.

Turning now to Wikipedia for a definition of Yield.  It is the cash amount as a percentage that the owners of a security receive – comprising dividends or interest received from the security.  Normally, unlike the total return, it is absent price fluctations.

MarketWatch defines Stock Yield as annual dividends divided by share price.  As an example, let’s consider a stock trading at $50, and paying out $1 in dividends over the course of the next year.  Its dividend then is 2%.

Convertible Bond or Convertible Note or Convertible Debt (or Convertible Debenture, if it has a maturity of greater than 10 years)A type of corporate bond that carries the option of being converted into a pre-determined number of shares of the issuing company’s common stock or equivalent cash at a later date (Investopedia/Wikipedia).

Trading Volume (Wikipedia):  Trading volume, or simply volume, in capital markets, is the quantity of a security (or an entire market, or just a set of securities) that traded during a particular period of time.

The opening section of this blog post is all about trading volume.  If you missed it, please be sure to check it out by going there when you get a chance.

Secondary MarketA financial market that is also called the aftermarket.  It is where financial instruments that have been previously issued, such as bonds, futures, options, and stocks, are bought and sold.  Here, investors purchase assets or securities from other investors, as opposed to from the issuing companies themselves.  The New York Stock Exchange and the NASDAQ are national exchanges, and they are classified as secondary markets.  (Sources:  Investopedia and Wikipedia)

Float (TheStreet.com):  This is the total shares that can be traded.  It is derived by taking the number of shares outstanding, and subtracting from that number the closely held shares – those held by employees, company stock ownership plans for employees, insiders, and major long-term shareholders.

Spoofing (Wikipedia):

According to the 2010 Dodd-Frank Act, spoofing is an illegal act, wherein there is bidding or offering with every intention to cancel before execution.

Spoofing is a disruptive algorithmic trading entity.  Traders use it in order to outpace other traders and to overpower commodity markets.

Spoofers are traders who pretend to trade futures, stocks and other financial products.  In the futures market, as many offers are cancelled or withdrawn, this creates the impression of pessimism.  Conversely, the illusion of demand or false optimism is created when many offers are placed with no intention of follow-through.

Such traders bid or offer with every intention of cancelling their orders before they are even filled. The ensuing pronounced trading volume is designed to attract other high-frequency traders (HFT).  The ultimate purpose here is to cause a reaction in the market, such as influencing a security’s price.

Spoofing can cause the price of shares to rise and fall.  Based on this kind of intervention in the market, this activity can be very profitable for such traders, because they can time the buys and sells of securities.

Spoofing can also be used with other illegal activities, such as layering algorithms and front-running.

The main form of algorithmic trading used in financial markets is high-frequency trading.  Its extreme profitability comes from the high numbers of transactions (read, trading volume).

Ghosting (Investopedia):  This is an illegal practice involving two or more corrupt market makers who are involved in trying to manipulate a stock’s price, and thereby profit from price movement.  This is contrary to the law, which requires them to compete against one another.  The word ‘ghosting’ is used because such activity is hard to detect – much like a ghost or spectral image.

The trading volume of the underlying stock could be affected, depending upon the level of trading activity of the market makers.    

Multiple (Investopedia/Wikipedia): 

Price-to-Earnings ratio (P/E ratio or PER) is a popular multiple because of the significance of earnings per share as a value driver. 

The amount investors are willing to pay per dollar of earnings can be reflected in the term multiple, as determined by the P/E ratio.  A stock trading at $20 would have a P/E of 10, with earnings per share (EPS) of $2.

The Price-to-Earnings ratio shows the relationship between the current share price and its per-share earnings – a way of valuing a company’s financial well-being.  It can be computed as Market Value Per Share/Earnings Per Share.

Discount Rate (financial-dictionary.thefreedictionary.com):  This rate is set by the Federal Reserve, and is the rate used to lend to other banks.  It uses this rate to charge a bank which temporarily needs funds.  Collateral is required of a bank in this situation.  The Fed sees this as a short-term commitment to solve a liquidity problem – not a way for a bank to increase earnings.

Overnight Rate (Investopedia/Wikipedia):  This is the interest rate used by large banks borrowing and lending amongst themselves short-term (one day) in the overnight market.  Or, the central bank charges this rate to a financial institution wanting to borrow money overnight.  In some countries like the U.S., the central bank may target the overnight rate as the rate to influence monetary policy.

LiborLibor reflects the rates which banks can borrow at, with maturities ranging from overnight to one year.  The rates are calculated in London on a daily basis, when borrowing costs are reported by a panel of banks.  Not only is libor used as a benchmark for interbank loans, but it is also used for borrowings for credit card borrowers and homeowners.

Warrants (Investopedia/Wikipedia):  The holder of a warrant, which is a derivative security, can purchase the underlying stock from the issuing company at a set price (exercise price) by a predetermined deadline.  A new debt issue includes warrants as a ‘sweetener’ to entice investors.  Warrants are like options, in that they both contractually grant rights to the holder to buy securities.

OptionsAn asset can be bought or sold as a function of the right granted by this type of contract.

CAPEThis is a cyclically adjusted price-to-earnings ratio – price divided by 10-year average of business earnings and adjusted for inflation.  Thanks to Dr. Jason Hsu, UCLA Anderson School of Management researcher (also affiliated with Research Affiliates) for this.

Closet IndexingA mutual fund that hugs the underlying market benchmark, but is sold as something that is actively managed.  It delivers little in the way of added value, and you wind up paying significantly more than you should (somewhere between one and two percentage points a year) – more than you would pay for say a plain-Jane exchange traded fund that tracks the same index, but efficiently and inexpensively. 

Closet indexing is rampant around the world, but most prevalent in Canada.

Trading volume related to closet indexing would approximate that of the underlying market benchmark.

(Source:  The Globe and Mail)

Economic Value Added (EVA)-Per-ShareA metric that measures the economic profit of a business generated over a given period of time.  Such measure highlights the value a company’s investments have been realized for the company.  This amounts to the difference between its profit and what the investments cost to generate that profit.  A company that has a positive EVA qualifies as ‘creating shareholder wealth.’  An improvement in economic performance is evidenced by EVA increasing across periods.

(Source:  Nick Winch, The Globe and Mail, May 26/15)

Earnings Per Share (EPS) (Investopedia):  That part of company profit assigned to outstanding shares of common stock.  Company profitability is reflected in earnings per share.

Velocity of Money (Investopedia/Wikipedia):  Sometimes referred to as ‘the income velocity of money,’ it is how frequently within a certain period of time the average unit of currency is involved in the purchase of newly domestically-produced goods and services.  Stated differently, it is how often, over a given period of time, one dollar is spent to buy goods and services.  For even further clarification, it is simply how fast money exchanges from one transaction to another, and the extent to which a unit of currency is used over the course of a pre-determined length of time.

The measurement of velocity of money is usually stated as a ratio of GNP to a country’s total supply of money.

Commercial PaperCommercial paper is short-term bank debt (IOUs) issued to raise money for short periods.

ETFs:  ETFs trade like a stock, and are low-cost investment funds.  Those that track the returns of major bond and stock indexes are the cheapest ones, whereas pricier versions have managers picking securities.

On the subject of ETFs, it should be noted that a rotation to large-cap stocks is normal during periods of market volatility – this due in part to exchange-traded funds buying activity being weighted toward bigger companies.

Open InterestThis relates to futures and options, and is the number of commitments or contracts outstanding that are trading at any one time on an official exchange.  Open interest is a whole subject unto its own, and would require more attention than I can give here.  But, I will try to cover such topics as open interest analysis, open interest calculation, and open interest versus volume in a future post.

Quotes to Live By

“We may not all be on the same boat but, on the water, we are all on the same wave length.”

Mark Twain:  “Getting started is the secret to getting ahead.”

Kurt Vonnegut:  “We are what we pretend to be.”

Thomas Edison:  “1% inspiration, 99% perspiration.”  (Even though he was the inventor of the light bulb, he was afraid of the dark.)

Warren Buffett:  “If you’ve been playing poker for half and hour, and you still don’t know who the patsy is, you’re the patsy.”

Marie Curie:  “One never notices what has been done; one can only see what remains to be done.”

Losers say, “yesterday,” winners say, “yes.”

Trivia

The only time the U.S. was ever debt-free was in 1835, and that was under President Andrew Jackson.

Be Thankful For
What You Have

I watch Joe M. Terranova almost every day on CNBC.  He recently developed a health issue.  Here is his story:  TheNextFiveMinutes.

Joseph M. Terranova is with Virtus Investment Partners, where he is a Senior Managing Director – a position he was promoted to in May 2014 – having joined the firm in June 2008.

Virtus is listed on the Nasdaq as VRTS.  As an asset management firm, it manages more than $60 billion.

Thank you friend for taking the time to read through this blog post.  I hope you enjoyed all the topics, including the opening piece on trading volume.  If you missed it, please take a look at your convenience.

Stay tuned… there will be many, many more posts to come.

In the meantime…

If you would like to help me start a forum and be a moderator, I would love to hear from you.  Just drop me a line using the Contact provision at the bottom of my site.

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I won’t live long enough to know it all, and I won’t live long enough to make all the mistakes myself.  So, hearing your story will be most helpful not only to me, but also for my other beloved readers.

Please share this post.  Sharing is caring.  Thank you!

I look forward to your articles, feedback, ideas, stories, and suggestions for my blog.  Please post these on my blog at the Contact link below.  

HAVE FUN and ENJOY LIFE!  Remember – FAMILY comes first!

Here’s To Your Success and Quality of Life,

prbain

Peter R. Bain
PS:  Don’t let them steal your dreams!
PPS:  I will help you achieve your dreams!

About Peter R. Bain

Picture of Peter R. Bain, founder of www.TradingSmarts.com – the go-to site for all things trading.

Peter R. Bain

I am a speaker, trader, writer, aviator, car nut, Harley enthusiast but, above all else, I am here for you at TradingSmarts, which I founded some 15 years ago.

TradingSmarts is your best friend when it comes to finding anything and everything to do with trading.  Through my blog you will always find guides, news, reviews, tutorials, and much, much more.

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Peter R. Bain

I am a speaker, trader, writer,
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