The headline reads: “Market down three straight days on light volume.” Now you know what “market down” means, but do you know what “light volume” means? In case you don’t, it goes like this: volume = number of shares changing hands. Therefore “light volume” means there’s fewer number of shares changing hands than normal.

Here’s a simple example of how volume impacts volatility: Let’s say we get bad news out of Europe, or the U.S., or China, or Capitol Hill, or wherever, and you say “enough’s enough.” You’ve ridden that one share of Apple from $40 to $400, you checked Yahoofinance.com and see it priced at $385 – you’re ready to bail.

So you call me and you say “sell my Apple, I’m goin shoppin.” And I say, “at the market?” And you say “at the market, or wherever I feel like shoppin.” I chuckle and say “I mean do you want me to sell your Apple at the market?” You say “you mean you can’t sell it from your office?” I chuckle and say “I mean are you willing to take whatever you can get for it, or do you insist on a price?”. You say “I want $385”. I say “great.” You say “can you direct deposit?” I say “sure.” You say “when?” I say “when it sells.” You say “huh?” I say “somebody has to be willing to pay $385.” You say “Oh (long pause), okay. But what if nobody’ll pay $385?” I say “then it won’t sell.” You say “get what you can for it.” I say “great.”

So I put in a sell order, at the market, and it fills (sells) at $350. I call you and say “it sold at $350.” You say “geeze! Is that all?” I say “yep. Europe, etc., has buyers skittish at the moment.” You say “hmm, I guess that makes sense.”

Now let’s say you and the sucker (or genius), willing to pay $350, were the only two market participants today. Even though only a single share traded hands (very light volume), the headline reads “Apple plunges 9.1% on European debt fears.” Feels like all hell’s breaking loose, but in reality, there’s no panic – it’s just that, for today, nobody’s in the mood to buy.

Really quick, let’s turn it around. You just figured out your new iPad 2 (you’re a new man/woman), and you want to own the wonderful company that created the instrument of your new passion. So you call me and say “I want to buy a share of Apple.” I say “great. At the market?”. -(let’s skip the “huhs”, etc.)- You, seeing it on Yahoofinance.com at $385, say “sure.” I call you back a bit later and say “you got it for $420.” -(let’s skip all the dialogue)- Why so high? Because the news out of Europe was good, and the sucker (or genius) who owned that share of Apple wasn’t willing to let it go for anything less than $420… Even if you and the seller were the only two in the market, the headline would read “Apple skyrockets 9.1% on European optimism.”

As for this week; the Dow’s off a few hundred points on “light volume”. I.e., no big downside conviction (a few sellers), just nobody feeling like buying (at yesterday’s prices)– I suspect because of news out of Europe.