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Why Low Volume Isn't an Ominous Sign for Stock Market's Rally

NEW YORK ( TheStreet) -- That the  Standard & Poor's 500 Index's move above 2,000 was accompanied by low volume Tuesday may not be as ominous as many believe.

The PowerShares QQQ (QQQ) , SPDR Dow Jones Industrial Average (DIA) and SPDR S&P 500 (SPY)  moved to record levels this week on improving U.S. macro-economic data and talk of stimulus in Europe, finally. And this comes despite Russia apparently sending troops into Ukraine.


SPY Chart
SPY data by YCharts

One cautionary note, however, is that the move of U.S. equities to record highs has come on low volume, perhaps because investors may be reluctant to invest fresh capital at levels where valuations appear to be stretched.

The narrative has been the same for many months now: The economy is improving and corporate results remain steady, but investors are waiting on the sidelines.

Must Read: 10 Stocks Carl Icahn Loves in 2014

The issue of low volume, though, appears to be a structural one. The chart below shows the average monthly volume of the S&P 500 from 1950 to the present day.

Average monthly trading volume in the S&P 500 remained relatively flat from 1950 until the turn of the millennium, when it grew exponentially before peaking in October 2008.

>>Read More: ConocoPhillips, Cut by Warren Buffett, Can Be Yours on the Rebound

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