A Teflon Rally Running on Volume Fumes 26 comments
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For a while now, we’ve been concerned that volume hasn’t been powering the market higher. In fact, if you think of volume as fuel for any sustainable market rally, then we’ve been running on fumes for a few months. Since I wrote that in early June the market wobbled a bit and traced a shallow correction but before long it was on to new highs for the year. This has been a teflon coated rally.
But there is no mistaking that what we are seeing is a true outlier in terms of historical market performance. Here is a chart from Hussman’s most recent commentary which shows the six-month percent change in the S&P 500 from the bottom of each bear market (going back to the early 1940’s) compared to the percent change in volume over that same period:
Source: Hussman Commentary
As you can see, this rally is the largest one powered by the least volume. If we imagine a “best fit” line for the data, it would be going from the lower left to the upper right, implying that usually, the more volume, the bigger the recovery from a bear market low.
The state of volume (or lack thereof) is even more alarming when you consider that for the past year a baker’s dozen of stocks have grown to account for eyepopping proportions of total volume on the exchanges. Just to give you an example, on August 6th 2009 Citigroup (C) and Bank of America (BAC) accounted for 25% of total NYSE volume. Dr. Brett have brought attention to this last month: The Recent Concentration of Volume.
There are many theories about what exactly is behind this crazy volume: daytraders, HFT, short covering, secret government recapitalization, etc. Whichever reason is the real one, a market structure where total volume is distorted by such gigantic proportions from a handful of issues is, simply put, deceptive.
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On Sep 23 06:34 AM chap08 wrote:
> Not to rain on the parade of masochism, but a few other points to
> consider:
>
> 1. The chart compares the position now with the bottom of the market.
> What we've been through has been a deep and violent sell off - more
> deep and violent than any of the other bear markets in the graph.
> We saw huge volumes of stocks being indiscriminately dumped - it
> was outright panic. So, it should not be too surprising that we don't
> see such huge volumes, in a short period of time on the way back
> up. On the graph we are comparing 2009 with the likes of 1966 and
> 1984. In terms of market action, there is no comparison.
> 2. If you look at a graph of say the S&P500 or Nasdaq over the
> past few years, volumes now are higher than they were during the
> previous bull market. I don't remember anyone saying then that volume
> was an issue.
> 3. We now have something that didn't factor in any of the other periods
> shown - dark pools. I don't know what goes on in there, do you? What
> I do know is that large blocks of shares are traded in a way that
> is not reported publicly. They are designed to be obscure.
>
> If you're bearish, I don't want to change your mind, but I don't
> think this volume data is a compelling case for the market to fall.
I don't know if I agree with the idea that volumes are not being reported, suggestive of an "off-the-exchange" exchange I can't refute it either, but with respect to volume generally, as a proxy for demand, there just doesn't seem to be any.
Notice not only the radical departure from reality of the 2009 rally, but also that of the last two prior ones: 1998 and 2003 which were on the bubble-prone edge of data cluster. The writer speculates on the causes of the 2009 bubble, but one thing is clear. There is, with 401k's in gear (people always contributing blindly), and those people convinced of the market's so-called long term benign nature (ya, right), there is a great deal more money to be played with (read; market manipulation). That graph needs to be done using absolute values too -- not just "percent change," but using the actual number. Armed with that information, you I think would see that it is another Ponzi scheme. Just like Congress plundering the Social Security fund, marketeers are plundering the stock market where people have tried to put their retirement money: inflating it for personal gain, then dropping it on its head and doing it again.
The market is not the economy and the economy is not the market, and there is monetary incentive in the market, and the rally will be real when the sub market indices' market correlation begins to fall.
The market is assuming that the past is a one time isolated event, and that the government support will bridge the gap of the typical recession. However, the recession will be over when year over year domestic revenues increase, excluding foreign revenue at a favorable exchange rate. and capacity utilization broaches 75%.
until then the volume will be light, consistent with increased savings rate, decreased growth through credit, and an slow destruction of old capacity, slowly increasing capacity utilization.
Who was selling after March. If you were going to, you did previously, if you didn't sell it was because you were to far under water and wouldn't sell. Most likely hoping to recover what you lost.
People will be quicker to pull the trigger next time and sell this market at the first signs of another down turn in hopes of not being stuck back at March lows and still holding the bag.
Next trip down will be FAST and FURIOUS.
1. Flash trading exaggerates volume
2. Dark pools under-report volumes
3. Gamblers in C, AIG, FNMA, etc., going long, then short, then long, etc., driving enormous volumes in these stocks.
The first needs to be controlled because ordinary investors cannot compete and pay the profits that flash traders make. The second needs to be reported to make prices and volumes and visible to all. Many will find a rationale for the secrecy, however it truly flies in the face a free market where information is supposed to be equally available to all. Dark pools a private markets that significantly impact public markets secretly.
The third, gamblers, they are fine to the extent that they are not in the 1 or 2 category, above. Whether it's speculation or investment it is up to each investor to decide for him/herself.
This way, the powers that be can claim that, were it not for X, they would have had everything peachy by now.
Everyone should have some long dated out of the money calls in 2x inverse ETF's as an insurance policy against this possibility.
I look at it as term insurance. I've lost money on these options so far this year. However, I'm still up over 30% overall YTD.
This way, I'm able to stay mostly invested and not worry about getting slaughtered by some unpredictable event.
That doesn't make this rally "false," either, any more than the government's tightening in the 1930's made the Depression "false." It happened, it's in the books.
The fact is, we don't know whether Bernanke's strategy for getting through the current Great Recession will work in the end. We do know that, so far, it has pulled the financial system back from the abyss, triggered a 6-month 50% rally in the stock market, and appears to be helping to bring the recession to a technical end. Beyond that, the future is unknowable. Right now, things seem directionally correct, but whether that direction will continue as the government withdraws its extreme levels of support is open to legitimate debate.
Further, we experienced a liquidity crisis in all asset classes other than equity during 2008; accordingly there was abnormal volume during the crisis (when compared on a YoY) basis, yet volumes are still consistently higher on a moving average basis.
Finally, as indicated by assets currently in money market funds and comments from various institutions, there is still a great abundance on cash on the "sidelines." The PMs tracking the S&P will be forced to deploy assets and join the rally sooner or later.
On Sep 23 06:34 AM chap08 wrote:
> Not to rain on the parade of masochism, but a few other points to
> consider:
>
> 1. The chart compares the position now with the bottom of the market.
> What we've been through has been a deep and violent sell off - more
> deep and violent than any of the other bear markets in the graph.
> We saw huge volumes of stocks being indiscriminately dumped - it
> was outright panic. So, it should not be too surprising that we don't
> see such huge volumes, in a short period of time on the way back
> up. On the graph we are comparing 2009 with the likes of 1966 and
> 1984. In terms of market action, there is no comparison.
> 2. If you look at a graph of say the S&P500 or Nasdaq over the
> past few years, volumes now are higher than they were during the
> previous bull market. I don't remember anyone saying then that volume
> was an issue.
> 3. We now have something that didn't factor in any of the other periods
> shown - dark pools. I don't know what goes on in there, do you? What
> I do know is that large blocks of shares are traded in a way that
> is not reported publicly. They are designed to be obscure.
>
> If you're bearish, I don't want to change your mind, but I don't
> think this volume data is a compelling case for the market to fall.
A forced negligence rally?
Up, up, up and away we go, toward another implosion.
www.tradingstocks.net/...
The big picture says we are at the top of a major (400 years in fact) bull market. The crash will be one for the history books:
www.tradingstocks.net/...
On Sep 23 06:34 AM chap08 wrote:
> Not to rain on the parade of masochism, but a few other points to
> consider:
>
> 1. The chart compares the position now with the bottom of the market.
> What we've been through has been a deep and violent sell off - more
> deep and violent than any of the other bear markets in the graph.
> We saw huge volumes of stocks being indiscriminately dumped - it
> was outright panic. So, it should not be too surprising that we don't
> see such huge volumes, in a short period of time on the way back
> up. On the graph we are comparing 2009 with the likes of 1966 and
> 1984. In terms of market action, there is no comparison.
> 2. If you look at a graph of say the S&P500 or Nasdaq over the
> past few years, volumes now are higher than they were during the
> previous bull market. I don't remember anyone saying then that volume
> was an issue.
> 3. We now have something that didn't factor in any of the other periods
> shown - dark pools. I don't know what goes on in there, do you? What
> I do know is that large blocks of shares are traded in a way that
> is not reported publicly. They are designed to be obscure.
>
> If you're bearish, I don't want to change your mind, but I don't
> think this volume data is a compelling case for the market to fall.
The more unnatural distortion that occurs in the markets the more stress that builds. The risk of a rapid and uncontrolled release of that stress increases as well. Any unexpected shock could set off an avalanche. Enjoy the ride up but keep the parachute ready for quick deployment.
The statistician in me takes one look at this scatter plot and says there are only few historical inferences to be made between change in volume and change in the S&P.
The data points appear - almost - random. There's a general trend, yes… An increase in volume generally correlates to an increase in the S&P, but our "best fit" line (via regression analysis) would have a very low R squared and therefore be a very bad predictor of either variable.
Our current 55% increase in S&P despite a decline in volume of 20% is certainly extreme. But I’m not sure it’s any more unusual than say in 1978, when the S&P only increased 20% despite a near doubling of volume. (The difference between each case and our imaginary line is roughly equal.)
Also, it is worth noting that this graph dramatizes - perhaps overstates - the 2009 data point by emphasizing percent change in S&P: notice the numbers change by 10s on the vertical axes yet by 20s on the horizontal. This is an old ploy to exaggerate data, and makes the 2009 S&P increase seem much more extreme relative to change in volume.
However – if you look further behind the data, and note that around 40% of our recent volume is the result of trading ridiculous financial companies such as AIG - which survive only because of government intervention, and have little upside – then this scatter plot really does suggest that our current situation is a HUGE outlier. Whether or not we can draw much of a trend from volume and S&P pricing is another issue.
If you think the market is going up, would you sell?
Also the trading part of volume usually declines when stocks rise sharply over a short period of time,that's why the 98,03 and current bull markets have not seen a meaningful volume expansion compared to 74 and 82,when short term trading was a smaller % of total volume.