a subsidiary of Purpose Investments Inc.

Profiting from equity volume spikes

by Derek Benedet, CFP, CMT

A common saying for investors is that volume tends to lead price. By volume, we mean the number of shares traded from one owner to another in a single day. High volume days are evidence that an increased number of investors believe a share price is too high and others believe it is too low. This is price discovery in action. It’s these high volume days which we wanted to explore further to see if volume spikes carried any forward looking implications for the share price. And if so, should this be incorporated into an investment strategy.

One evolution of the market which has complicated volume analysis especially over recent years are the rise of high frequency trading (HFT). The specific definition of volume has one flaw, though every share traded is from one owner to another, the party on the other side, or both sides, is now more often a machine. The good news is that despite algorithms or HFT being a significant part of most of the volume, these trades tend to be ultra-short term, often washing themselves out over the day. Overall volume has actually declined somewhat from the highs in 2008, though it remains very elevated by historical standards. While volume is comprised of HFT, ETF basket execution and active investors, we find it still carries a level of information for the market and for changing levels of price discovery.

Why volume spikes

At the company level, volume spikes do not occur out of nowhere. They usually come in isolated episodes typically surrounding events such as earnings or important news, triggering significant buying and selling. It’s these events of heightened market activity that often bring out the worst in investor behaviour. When a stock is more active, investors may be more susceptible to making an emotional or behavioural mistake. It is this potential opportunity to capitalize on the mistakes of others that drew our interest. Identifying volume spikes is the first step in locating where and when the ‘herd’ is most active. What’s important is that the behaviour on these days is often extreme, not just from one participant but many participants. When volume is higher, does it mean the price is overvalued or oversold, evidence of changing attitudes towards price discovery? These periods of high turnover represent frenzied moments that let investor biases shine.

 

Read more

 

This material is provided for general information and is not to be construed as an offer or solicitation for the sale or purchase of securities mentioned herein. Past performance may not be repeated. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please seek individual financial advice based on your personal circumstances. However, neither the author nor Richardson GMP Limited makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use or reliance on this report or its contents. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments [and the portfolio manager] believe to be reasonable assumptions, Purpose Investments [and the portfolio manager] cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Return to Blog