Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
All the chatter about the market's low volume is beginning to get rather loud.
Yes, it's been slow. The 10-day moving average of New York Stock Exchange composite volume last week dipped to levels on par with the typical turnover of the year 2007, notes technical strategist John Roque of WJB Capital. The 12-month moving average of NYSE volume has declined to levels last seen in 2004, according to a recent report by Jeffrey Kleintop of LPL Financial Research. In the middle third of most days, the toughest job for traders is to ignore all the snoring.
This has given market participants a convenient "Yeah, but…" retort to anyone noting that stocks are challenging their bull-market highs, that most smaller-cap indexes are already there, and that the breadth of the market—rising stocks versus falling ones—is sitting at peak levels.
Louise Yamada, the longtime technical analyst now running her own research firm, last week invoked a standard market tenet attributed to her. "Volume," she wrote, "is the weapon of the bull, historically, and is generally essential to push the market higher."
This is but one reason Yamada says her "antennae are up for signs of any further weakening technical evidence suggesting more than a consolidation ahead." In other words, volume and other stats on the back of the market's bubblegum card are raising suspicion without yet handing up an indictment.
It's true that, all else being equal, brisker volume lends more credence to a market move. Still, all else is almost never equal, and the understandable craving for more robust share volume is not based on any ironclad historical relationship to share prices.
Jeff deGraaf of Renaissance Macro Research, studied prior low-volume rallies of recent decades and notes that the late 1998 surge came on below-average volume, and that volume also was unimpressive in the 2003 rebound. "We do not believe that volume over the last two weeks is an ample excuse to stay away from equities," he says. "In fact, when volume begins to pick up meaningfully…it's often close to a cyclical [market] peak in need of a consolidation," or a sideways-to-down rest period. This is what happened as volume rebounded in early 2004 and multiple times during the months that followed the 1987 crash and recovery. It should be noted, too, that investors' sense of what "normal" volume levels look like has been inflated, in part by the enormous order flow of the crisis meltdown and subsequent rebound. A three-billion-share day in NYSE stocks, now considered uneventful, would have been cheered as a feeding frenzy just a few years ago.
Other factors that seem to be dampening activity include the relatively slow flow of new money into traditional equity funds, and the dismantling of large banks' proprietary-trading desks in response to new regulations, which has removed some unknowable amount of leveraged, high-energy trading action.
Animal spirits, too, have migrated to markets other than stocks. Have you heard that commodities, such as oil and gold and silver, have been on a tear? So have the legions of traders flocking to chase them.
Even as stock volume has ebbed, the business in options has been heavy. CBOE Holdings (ticker: CBOE) reported that last month that average daily volume across all products rose 3% versus the total a year earlier, including a 16% rise in index-options turnover and a 25% gain in options on exchange-traded funds. And instruments tied to the CBOE Volatility Index, or VIX, set a record, despite a steady drop in the market's observed volatility.
Speaking of the slow-drip ebbing of volatility, this is another major factor holding back volume. Higher volume usually accompanies spikes in market jumpiness, especially today when the black-box, arbitrage-oriented "high frequency traders" are the marginal providers of volume on a daily basis. These firms take the other side of urgent order flow and feast on volatile moves. Calm markets leave less for them to do.
Adding it all up, the dearth of volume is understandable, yet without a clear implication for the market's direction. It's yet another way that the market feels like it's in the low-volume, Fed-medicated, range-trading, easy-corporate-credit, buyout-happy days of the middle part of the last decade.
One thing is for sure, however: With the market looking impressive but a bit overbought, with investor sentiment inching toward excessive cheer and with compressed volatility dragging down option prices, the opportunity to hedge stock holdings with cheap options is ripe.
E-mail: michael.santoli@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
The disk drive maker's stock should keep rising thanks to a bullish forecast and generous 5% dividend yield.
Barclays Capital argues that $150-a-barrel crude could add more than three percentage points to worldwide inflation
BMO Capital Markets gives an Outperform rating to shares of the drug retailer and pharmacy benefits manager.
Apple is aggressively adapting to a challenging situation, says Ticonderoga Securities.
Thanks to increased global demand for its planes, shares of Brazil's Embraer can return to heights last seen before the financial crisis.
A streaming deal with Netflix should boost Lionsgate shares.
Investors are sitting pretty after the home-furnishing retailer issued a bullish forecast for 2011.
J.P. Morgan raises earnings estimates and share-price targets for Las Vegas Sands, Wynn Resorts and Melco Crown Entertainment.
In upgrading shares of the business-software provider to a Buy, FBR Capital Markets argues the stock can gain another 30%.
Shares of Vertex Pharmaceuticals and Pharmasset could get a nice boost from drugs in development.
Pressure on commodity costs will continue, but worst myabver. (At SmartMoney.com.)
Surge in bullish sentiment among financial advisors isn't a good omen.
Gain Capital hopes to attract more foreign-exchange traders. That might not be easy, considering that three-quarters of its retail clients lost money in 2010's second half.
Most other banks battle inflation and strengthening currencies, woes largely influenced by the U.S. bank's policies.
Madison Square Garden is scoring with Wall Street and sports fans. The media and entertainment outfit could be worth twice as much as its current stock price.
The semiconductor company's planned acquisition of National Semiconductor will bolster TI's analog-chip business and boost its shares.
After stumbling in recent months, the stocks of Brazil, China, India and other developing nations are regaining their footing. Why they could outperform U.S. shares.
The movie version of Atlas Shrugged is both entertaining and true to its author's vision, our reviewer says. And guess who the guys in the white hats are.
Traders, not always given to reflection, take time to think about corporate profits, revenue growth and the not-too-distant end of QE2.
Barron's interview with newsletter writers Daniel Wiener and James Lowell III.
Federal entitlements are due to claim an ever-growing share of GDP.
Focusing on a company's fundamentals, not its stock-market value, makes indexes—and ETFs and funds invested in them—perform better, says a veteran investor.
Read Full Article »