Trusting Market Moves: Why Relative Volume is Important

In past posts, I have described a measure called relative volume, which looks at the current volume at a given point in the day and compares that to the normal, expectable volume at that time of day.

The idea is to see whether the market is unusually active or not. Significant variations in relative volume give us a clue as to whether large, institutional money managers are active in the markets. If so, they may be repricing assets, leading to possible trending moves. If the institutional money is relatively absent, we're more likely to see choppy and range markets dominated by market makers, algorithmic programs operating close to the market, and prop traders.

Let's take this morning as an example. After significant overnight weakness, we saw strong buying interest right from the market open, as noted in the intraday tweets. Volume in the S&P 500 e-mini (ES) futures for the first half hour was about 268 thousand contracts, not quite one standard deviation above the median volume for the first 30 minutes of trade. That is very healthy volume for a morning of very light economic news.

Seeing the solid volume coming into the market in response to weakness, hold above the Monday lows, and persistently lift offers in ES tells us that money managers were perceiving value as we moved toward 975 in that contract. It's when we see above average volume participating in breakouts and reversals that we can most trust those moves, as they have the support of participants that are market movers.
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