Montreal, Canada.

Dugald, my right hand at the office and responsible for global technical analysis for our client portfolios has repeatedly updated me on the state of trading volume on the NYSE since the intermittent March 9 low. It’s instructive to review why trading volume is important if this is truly a new secular or even cyclical bull market since March.

From a stock market perspective trading volume is the last big part of the puzzle that has yet to fall into place since March.

Recent research by Dr. John Hussman in the United States (Hussman Funds) reveals that at every market bottom since 1940 the initial five-week rally tends to be accompanied by a strong rise in trading volume.

For example, in the opening stages of the 1982 bull market trading volume grew by 40%. But in this rally, trading volume contracted the first five weeks off the March 9 lows even as stock prices posted their sharpest gains since the start of this recovery rally.

Hussman also reveals that bull markets don’t emerge from the panic selling – exactly what preceded the March rally. Rather, the bull usually starts from a period of relative calm in the markets. Most genuine rallies since 1940 began after markets fell less than 10% in the final four weeks of the bear phase; total market carnage preceded this rally.

Still, there’s no denying that Dow Theory turned bullish last week as the Dow and the Transports both confirmed new uptrends supported by strong market breadth. But again, trading volume has been rather weak.

Unlike this post-March rally, the big rallies that characterized the 1930s were supported by a rise in trading volume (see above).

The Dow finally hit a secular low in the summer of 1932 after collapsing 89% since October 1929. As the bottom was put in place in mid-1932 trading volume expanded along with prices while the same phenomenon occurred in late 1933. U.S. stocks thereafter posted a spectacular gain of more than 400% from mid-1932 until crashing again in 1937.

The big question is if this rally is the real deal or not? I doubt it’s a bull market. But there’s no doubt the tape has been red-hot and the advance-decline has markedly improved along with new highs versus new lows. Up volume has trounced down volume, too. Yet trading volume remains anaemic.

Great bull markets are fuelled by free-flowing credit. That environment is gone. Low nominal interest rates are positive for risk-based assets but then again interest rates are at these low levels for a reason – there’s no demand for credit. It’s hard to be a bull.