Tuesday, March 12, 2013

The Disappearing Volume of the Stock Market

There is only ONE legitimate reason or explanation for the rally in the stock market (even though when you adjust for inflation, we're still below out 2007 levels)

Inflation fears.

Of course, I don't credit the majority of investors (institutional or individual) or the majority of the money in the market with the intelligence to invest in stocks as a hedge against future inflation.  The fact that future profits will have inflation adjusted into them automatically would require too much thought on their part.

But what is even more curious than a reasonless rally is the severe drop in trading volume amongst the world's largest exchanges.

Normally a rally indicates higher volume, but there are several reasons for this traditional rule to be broken.  None of these reasons, however, bode well for your average investor.

High frequency volume trading automated by computers that manipulate the market (and still don't provide enough volume to offset the long term investment money).

A horrible distaste for investment left in the mouths of younger generations after a dotcom and housing bubble (not to mention no employment prospects and no money to invest).

Large hedge funds and institional investors swapping securities for diversification reasons.

But my favorite reason the article provides is "less volatility."

Since the financial crisis in 2008 the markets have become "less volatile" resulting in less people pulling out of the market, less people trying to time the bottom, and more money permanently staying in the market.

But ask yourself a question.

"How great of a reason is THE LACK OF VOLATILITY for a stock market rally?"

It once again is another desperate excuse, a desperate reason for stock markets to rally that once again ignores the only two things that should drive a true stock market rally -

1.  Increased profits
2.  Increased dividends

The fact volume is tanking, leaving a higher percentage of trading in essentially connected firms' hands, AND there has not been the increase in profits to bring the P/E of investments down to a sane level, means this is a rally only for the connected.

You might as well be a man trying to rationalize driving a VW Cabriolet by citing its fuel efficiency.


Anonymous said...

Low volume also means that you'll be hard pressed to find buyers when you want to cash in your chips.

But I think you might also need to look at equity options to get a better picture of volume. It could very well be that a lot of volume moved there.

'Reality' Doug said...

The NYSE (of Dow Jones index fame, but the Dow has a few NASDAQ companies) is down too. I did not do the calculation: http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=3162&category=3

she said: said...

25% of people are tapping their 401k's and they raised taxes on dividends and capitol gains. There is your problem right there. The only saving grace is the only people in this market are institutional investors. Which means they will get hurt disproportionately. I know that will trickle down to us all. Settle in - this is a scorched earth plan.

Anonymous said...

I suspect options are a lot more popular these days. Keep in mind, the 00's was a weird decade where selling volatility outperformed simply going long. Vanilla stocks lack so much flexibility, and vanilla investors are still spooked, that's all.

Long call options with much of the rest in bonds is a lot more risk averse than full exposure.

Anonymous said...

I've always had the feeling that it's more like the two Irish farmers selling the same horse to each other year after year for increasing prices. Finally one farmers sells the horse to a third party, and is asked by the other "Why did you sell the horse to someone else when we were both making a good living on it?"

Dave said...

I'm not worried. The Dow will never again fall below 14000 because Ben Bernanke won't allow it. His policies really work, why in 2009 the Harare stock exchange was tripling every day!

The First Joe said...

It's another bubble, pumped up by banks dumping their QE windfalls into the market.

Anonymous said...

I disagree with Anonymous 6:35 about bonds. The real rate of inflation is higher then what most bonds pay. Parking your money in most bonds will just lead to you losing buying power.

I think one of the reasons the Stock Market is going up with little volume is due to companies buying back their own stock. Many are afraid (with good reason) to expand their businesses right now, so they are taking their profits and buying their own stock back.

The primary reason is all the new dollars being pumped into the system by the Fed, though.