One of the hallmarks of classic (read: old school) technical analysis is the role of volume in confirming market movements.  For instance, if 10yr yields break through a key technical level, the next question many traders will ask is whether or not it happened with strong volume.  

While this sounds pretty smart in principle, it's trickier to apply to living, breathing markets.  There are so many variables in play that it makes more sense to temper our enthusiasm for high volume moves a bit.  Some of the curveballs are as follows:

  • A high volume move could be due to a snowball of trading positions being forced through "stops" (stop-loss levels--automatic triggers to buy or sell based on certain conditions).  For instance, if there are 10 buyers and sellers in an entire market for fidget spinners and only 11 fidget spinners in existence (if you don't know what these are, you are lucky), AND if each trader has a stop-loss level in place where they will sell their spinner, AND if those levels are $10, $9, $8, and so on, all the way down to $1, as soon as the first spinner is sold for $10, the first trader sells automatically.  If the buyer offered $9, the next trader sells automatically.  The pattern repeats and almost instantly, the price of fidget spinners is down to $1.  The result is that fidget spinner holdings have changed hands, but the market is still there.  Prices will likely bounce back absent a fundamental reason for prices to remain lower.
  • Sometimes markets move past key levels in low volumes and never look back!  This is just luck of the draw, but it means that negative bond market movement in low volume shouldn't necessarily be ignored.
  • Finally, positional considerations can add to volume in deceptive ways.  For instance, if a high number of traders have been betting on rates moving higher, and then encounter a reason to cover those bets (either rates have moved high enough to net a good profit, or rates have begun to bounce in such a way that they need to protect their gains, similar to fidget spinner scenario above), we'll suddenly have a glut of volume and bond buying.  Hmmm.  Let's see.  High Volume?  Bond Buying?  Sounds great, right?!  Except in this case it could merely be a quick intermission for determined sellers who are getting ready to push rates even higher after finding new entry points.

The point is that high (or low) volume can be meaningful.  But it's not always meaningful in the same way for the same reasons.  Subtleties and counterpoints must be considered.  One of the safest ways to look at the importance of high volume is when bonds bounce (either on a ceiling or floor) in very high volume, and in the presence of key events.  Ideally, the extreme level reached during the bounce shouldn't have been seen or exceeded in recent days/weeks, and should continue to go unchallenged in the coming days/weeks.  In THAT case, we have a great technical line in the sand that will definitely tell us something when and if it's broken in the future.

What's the point of all this today?  Volume and liquidity should be quite low, given that there is nothing on the event calendar and that it's a summertime Friday.  It is safe to say that we shouldn't read too much into any of the movement we're about to see unless an unexpected headline hits and volume miraculously picks up.  Even then, the light liquidity (fewer buyers and sellers--not necessarily lower dollar volume) means that prices/yields can move very quickly if stop-loss levels are taken out.