Monday, January 14, 2002
by Donald Cassidy
Technical analysts make their living explaining how movements in stock prices - the wiggles the traces of transactions make - can foretell future prices. Donald Cassidy, who worked for Lipper, Inc. as an analyst of mutual funds, says this is all wrong. It is not price, but volume of trading that predicts price moves, he says. He disparages the balance sheets and scholarship of fundamental analysts in a sweeping remark: "News does not change prices (although sometimes it may indeed reveal a shifting of future value)."
Any investor new to the ongoing battle between fundamental analysts and technical analysts might be persuaded by this book's facile prose that the author has discovered a holy grail of investment truth.
"The signals that trading volume provides....are useful exactly because they are based on a realistic assessment of the psychological factor that have prompted large numbers of other investors to act.....When the crowd is done, the price move is done. So believe what the volume data will tell you."
Let's get down to basics here. Volume data indicates fashion or widespread fear or enthusiasm. It does influence price moves and it can tell traders about price momentum. But volume is itself driven by news, contrary to what the author says. Read this book to get a feel for volume's influence on price. But to think that news of such things as bankruptcy does not matter is to live with a delusion. News and the information it conveys is not necessarily predictable, but it is very much an influence on price and volume.
Read this book as a spotlight on the role of volume in determining price. The reader who accepts the author's argument that volume tells everything will be on shaky ground. Given the intent of the author to prove that only volume matters in determining price, this book should be left to experienced investors to ponder.