Stock trading volume has hit fresh highs this week and last, as investors place their bets on a market turnaround.

Average daily trading volume reached 1.6 billion on the NYSE and 2.1 billion on the Nasdaq last week, the highest level this year for both exchanges.

"Stocks have moved up on expanding volume and down on weak volume," said Frank Gretz, market analyst at Shields & Co. This is a signal that investors who once were afraid of jumping back in the market are choosing strong sessions to slowly start buying, he said.

This week, the Nasdaq broke a single-day record for 2003 on Monday with 2.5 billion shares traded. On the same day, the Dow posted volume of 1.7 billion, also one of the highest this year. On Tuesday, even though investors grew cautious amid news of new probes of corporate misdeeds, markets managed to close with gains, and volume was still healthy, hitting 1.4 billion on the NYSE and 2.1 billion on the Nasdaq.

Anaylsts cite waning geopolitical tensions and a strong first-quarter earnings season for the optimism. Also, some fund managers have been scrambling to get in on the rally. "We're seeing institutional investors being forced to enter the market, with a huge need for equities that wasn't there before," said Charles Ryan, an equity analyst at BB&T Asset Management.

On an annual basis, volume shrank for the first four months this year on the Nasdaq and didn't show signs of life until May. Meanwhile, on the NYSE, volume in the first four months remained relatively stable compared with the year-earlier period, but jumped 18% last month.

Still, investors should think twice before they leap blindly back into the market, some experts warn. "It's been very encouraging, but whether this will continue into the summer doldrums remains to be seen," said Joe Kalinowski of Puglisi & Co.

Previous periods in which rallies have been coupled with stronger-than-average trading volume haven't followed through with a continuation of the gains. After markets hit their October lows last year, volume gradually increased, reaching a monthly average of 1.4 billion on the NYSE and 1.7 billion on the Nasdaq in November, when the averages peaked. But volume fell back to previous levels, along with a pullback in the indexes.

Some market analysts say stocks have moved too far too fast, and could be due for a correction. The Dow is at its highest level since early December of last year, while the Nasdaq has broken above the peak reached on June 5, 2002. The S&P is also near its 11-month high.

"I agree, this volume is showing a conviction that wasn't there before," said Ryan of BB&T. "But we might start to worry about valuation."

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