What’s Wrong With All-Time High Stocks? Low Volume Rises Just Don’t Look Right

Better performing all-time high stocks usually have robust trading volume when moving to new, higher levels. Recently, though, many of the rises have been accompanied by mediocre or even lower trading volume. While this stock market certainly has a mind of its own, these lightly supported gains could be a sign of air pockets developing. If so, that could mean buying opportunities coming when the air dissipates.

Disclosure: Author has sold all-time high stocks and built cash reserves

Example: Ametek

Ametek is a well-behaved stock that rose to new highs in May. Appropriately, the upward move and breakthrough of its 2015 high of $57.67 was built upon increased trading volume. Over the past six weeks, however, volume has shrunk even as a dip provided a buying opportunity followed by the past three-week rise and capped by today’s (9/14) move into new high territory. The daily and weekly graphs below show the picture…

John Tobey

Ametek – Daily stock chart

John Tobey

Ametek – Weekly stock chart

This weakening of trading volume does not mean Ametek’s bullish uptrend is about to turn into a bearish downtrend. However, it does mean that the stock’s latest rise is weakly supported and carries at least a temporary reversal risk.

(For that reason, I sold Ametek today, with a plan to continue tracking the stock, looking for another buying opportunity if conditions change.)

A general deterioration of all-time high stock actions

I continually track new all-time high breakouts, looking for attractive buying opportunities. However, the pickings have become slim, with recent weak or adverse patterns finally resulting in my tossing out this week the last of the stocks I have been following. In each case, the reason is unimpressive trading volume.

Importantly, while all-time high stocks, themselves, may seem a sign of speculation and over-optimism, they are a natural development in the world of growth companies. Therefore, such stocks can be a sign of strength. Conversely, if they begin to act poorly, that can be a negative sign.

Hopefully, today’s weaker picture is either (1) a new normality that is a reflection of the times we are in, or (2) the advent of a temporary stock market reversal.

The bottom line

In spite of the large number of stocks trading in all-time high territory, there appears to be deterioration in the stock movement and trading activity picture. Weakly supported stock rises (upward drifts) could be a natural occurrence of money slowly but steadily flowing into such stocks, perhaps caused by continued index investing.

However, my experience is that new highs carry a special sense of possibilities and risks to many investors, meaning different bullish/bearish points of view typically ramp up trading volume when stocks reach new highs. Without that action, the gains give the sense of an air pocket forming that could collapse.

For long-term investors, it is a situation of which to be cognizant, even if it calls for no action. For speculators, the weak rises could be a chance to raise cash in anticipation of buying opportunities ahead. The “downside” is that the stocks continue their quiet rises and no declines emerge to allow buying on the dip.

A final point: This is not a dull market

A long-held Wall Street belief is that investors should not short a “dull” market. Here is the explanation from Investopedia:

DEFINITION of “Dull Market”
A market where there is little activity. A dull market consists of low trading volumes and tight daily trading ranges. There is very little change and action during a dull market. A common phrase when dealing with dull markets is, “never short a dull market.” Some believe that the market is storing energy during dull markets and that the market is preparing for a rally.

However, the low trading volumes I speak of are in times of change – price rallies. That abnormal mixture is the concern, not simply a general dullness.


About the author

Loknath Das

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