10 April 2011

Nifty : Long Term Trading Interest

Volume of trading has always eluded analysts who try to make sense of it. Classical technical analysis says that a directional move should always be validated with relatively higher volume. If such is the case then we can expect the trend to continue or even strengthen. So in a bull market the rallies should have higher volume than corrections, and in bear market the corrections should be having higher volume than the rallies. Volume spike at the fag end of rally can be considered as the euphoria phase of the market, but we will come to know that only in hindsight.

Off late, we have been seeing a lot of anomalies happening in the volume vs price action, especially in the western markets. The current rally in the S&P 500 since March 2009 is a living proof of this. After the initial burst, the US market has practically crawled up in relatively thinnest volume. This has made technical analysts question its sustainability since long, but the rally has proven them wrong consistently.

The chart above shows Nifty, its 200 dma, 200dma of turnover volume and 200 dma of traded shares. I have used both shares traded and amount in Rupees, so that we get a better idea of the volume. As the bull market progresses, prices increase and hence does the turnover. So shares traded should give us more exact figure to deal with interest in markets.

So, just considering the shares traded curve as of now, we see that it has been in a continuous uptrend since 2006 till mid 2009, during which Nifty rallied from roughly 2500 to 6300, corrected back to 2500 and then again rallied to 5000. Its the rally that has been post 5000 that has seen lower interest.

So can we go back and check when this kind of loss of interest in trading happens in Nifty? In the chart, we can see 2 more such peaks in trading volume. 1st being mid 2004, when Nifty rallied and then corrected, before continuing the rally again in mid 2005. 2nd can be seen in 2001, which mostly coincides with the correction.

What can be seen is that when the volumes are higher it is generally accompanied by higher volatility in prices. You can also say higher volatility in prices drives volume higher, but the fact remains that the two go together. Volumes have come down substantially lower from peak since mid 2009 is in conjunction with the fact that prices have been in a range.

Also, to be noted should be the duration of this period where volume keeps coming down. Going chronologically, 2001 peak to trough lasted around 1.5 years (from early 2001 to late 2002), from mid 2004 to 2005 (1.5 years), from mid 2009 to date which is also just under 2 years. So looks like we are kind of done with the falling volume period in the longer time frame and there should be a decent uptick in volume going forward. Which means there should be an increase in longer term volatility.

As a matter of concern, the falling interest in stocks even as Nifty has managed to crawl higher, is a sign of fatigue, with overall fundamentals gasping for breath, and period of easy money (at least for FIIs) looking to end sooner than later, crude oil and inflation worries looming, and overall valuation fluctuating between over valuation and fairly priced, I think we can see another bout of flight to safety trade, pulling the market lower. That should raise interest in stock market!


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