Weekend Market Commentary: Special Edition

August 9th, 2014
in Gary's blogging, Special Post, syndication

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Weekend Market Commentary: What's Happening To The Volume or Lack of It?

UPDATED: 0900 EST 2014-08-15

By now everyone is aware the stock market volume levels are down, 50% in fact since 2008 and traders, including investors are far and few in between. When you have no real volume or volatility, and as of late, no real trend it becomes a killer for the trader and investor alike.

Why is the volume so low and what can it to the stock market?

Follow up:

Actually, there a lot of reasons why volume is low, one reason is that the 'Mom and Pop' investors have left the market after getting their portfolios wiped out in the dot com experience. The subsequent 'Great Recession' debacle took out the rest holding on and the market has virtually lost a generation of investors.

"Individual investors don't want much to do with stocks," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. He has pointed out that money has been bleeding out of stock mutual funds. "They're being pushed out of the market due to the scary headlines - Facebook IPO, JPMorgan London Whale, Knight glitch - which they perceive to mean that the stock market is performing poorly. But of course it's been going higher, and that makes people angry."

Barry Ritholtz , writes that Exchange Traded Funds (ETF), shifting from brokerage to asset management businesses and policies of the Federal Open Market Committee policy, are the main reasons that are driving trading volume lower.

Where Have All the Traders Gone?

The financial services industry have (sic) begun to feel the pinch of the fallout from low volatility and zero interest rates. The average return delivered by hedge funds has fallen sharply since the beginning of the year. Pension funds are under pressure because of highly depressed bond yields. The brokerage and investment banking industries have also been under siege by the rapid decline in trans-action volumes and deal flows.

Another reason for the large drop in volume can be traced back to the start of High Frequency Trading algorithm computers (HFT) which shifted the profit taking and market volatility from the human traders to the algorithmic computers. This in turn has changed the markets in a study of boredom for many and traders are now writing blogs.

According to John Shmuel, "Lehman's fall caused markets to dry up, which is why some exchanges, such as the New York Stock Exchange, subsequently courted high-frequency trading firms with incentives to use their exchanges. The NYSE calls this its supplemental liquidity providers program." I am not convinced, but that is what the proponents of HFT say.

In his article, The good and bad of high-frequency trading, he writes:

. . . market volatility today is near record lows (the short-term VIX index, a measure of volatility, dropped to its lowest level ever earlier this year) even though high-frequency trading is more dominant than ever.

One of the issues that does come out is the lack of volatility . . . They're telling me the lack of volatility is a bad thing because there aren't the kind of trading opportunities that there used to be before.


Buff Dormeier writes, "The markets are up but on light volume." That's the financial headline but how does it concern us?

What Low Volume Means For the Market

Volume is useful in terms of its "relativeness." That is, "Is volume higher or lower than it was previously?" That perspective is the most important aspect of volume analysis.

However, when viewing the market holistically, it's also important to know where you are within the secular market cycle. Secular bull markets are born on low volume and die on high volume. Secular bear markets, on the other hand, are born on high volume and die on low volume.

Secular bear markets are generally not down trends, but largely sideways movements of deep drops and recoveries. Over time, investors come in on dips, but they generally get burned and, once again disenchanted, move quickly back out. As more and more investors realize the struggling stock market offers little reward -- only risk and danger -- they increasingly head toward the exits. This results in lackluster volume, often signaling the death of the secular bear move.

In other words, we may be on the verge of a secular bear market and maybe it is time to consider looking at your portfolio to weed out the non-performers and especially those that will not do well in a decline. What do you think?

(Follow Closing Market Averages at end of this article)

WTI oil closed Friday at 97.62  up +0.31    (+0.32%)

Brent oil closed Friday at 104.66  up +0.45    (+0.42% )

The Demon The Gold Bears Are Mistakenly Overlooking

Gold closed Friday at 1294.30 down -1.50    (-0.11%) )

Copper closed Friday at 3.219  down -0.008    (-0.24%) )


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Friday's Closing Market Numbers

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Written by Gary

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