This week’s featured indicator blends two important ideas: volume and conviction.
The volume part is fairly straightforward. We measure how much trading activity happens in stocks that are going up—what we call Volume Demand—and compare it to the activity in stocks that are going down—Volume Supply. Just like in economics, when demand exceeds supply, prices tend to rise. The same logic applies here: when Volume Demand outweighs Volume Supply, the market usually moves higher.
But that’s only half the equation. Conviction matters too. To capture that, we take Volume Demand, subtract Volume Supply, and smooth the result with a 4-day moving average. That’s our indicator, shown as the orange line on the chart.
So, what do we do with it? After optimizing the indicator to the S&P 500 Index (green line, top panel), we find that when the indicator rises above the lower dashed line (-0.25), it generates a buy signal. When it falls below the upper dashed line (0.8), it triggers a sell signal.
Going back to 1982, the difference is striking. During buy signals, the S&P 500 has averaged a 16.7% annualized gain. During sell signals, it’s lost about 2.4% per year.
That’s a powerful distinction—and it tells us something important about investor behavior. When trading volume expands on advancing stocks, it’s a sign that buyers are acting with confidence. When volume builds on the downside, it suggests fear is taking over. Put it together, and you get a complete picture of investor behavior as it relates volume and how that translates to the market’s overall trend.
Where are we now? Back in April, we got a buy signal when Volume Demand turned the corner on Volume Supply and started climbing sharply. Since then, buyers have continued to press their advantage. Today, Volume Demand is running more than four times higher than Volume Supply—a powerful signal that buyers still hold the upper hand.
For now, we’ll put this one firmly in the bullish column.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.