It’s encouraging to see that one mainstream media outlet questioning the recent market melt-up which wasn’t just notable for the lack of volatility, but also a severe lack of volume. The new normal seems to be “No vol and no volume”, although we saw a bit of a regime shift today, before the normal reversal.
The WSJ noted today that “Stocks continue to hit record highs, yet those pushing them there are trading less and less. The number of stocks and exchange-traded products changing hands in the U.S. and Europe has fallen steadily in recent months as ultralow volatility, a lack of market-moving news and the rising popularity of passive investment funds have kept many investors on the sidelines.”
The chart below of trading volume in both regions is ugly, to say the least, especially in Europe where it’s the lowest in five years. Aggregated trading volume for NYSE, NYSE American, NYSE Arca and the NASDAQ this month is reported to be down 12% versus the average for the year and 22% below last year’s average. It’s become so bad that even ETF trading is 8.5% below last year.
No vol(atility) is causing no vol(ume) the WSJ concludes “The collapse in trading volumes is closely tied to the recent fall in volatility, where measures of daily stock price movements have plumbed multiyear lows. When markets aren’t moving, there are typically fewer people scrambling to protect their portfolios against further losses or seizing an opportunity to buy things that look cheap.”
Indeed, spare a thought for the sceptics who haven’t even had a “proper dip” to buy into recently. “Ed Campbell, a portfolio manager at QMA, a multi-asset business of PGIM, said he spent most of the summer holding a bit more cash, ready to buy stocks on an anticipated dip in the market that never materialized. ‘Things looked overextended and due for a pause…but summer came and went and that never really happened,’ he said. In September, QMA decided to give in to the onslaught of upbeat economic data and slowly add more positions in banks and small-cap stocks instead of embarking on a bigger buying spree.” According to Phil Orlando, Chief Equity Strategist at Federated Investors “there’s no need to make radical adjustments in your portfolio, so as a result you’re just sort of riding on what you have.”
As to what it means, the WSJ isn’t sure. It’s definitely bad news for banks and it might be bad news for equity investors, unless they’re so bullish they simply refuse to sell. “Some investors are mulling what the drop-off says about a global equity rally that has lifted many markets, including in the U.S., to new highs. The muted trading could signal that investors are holding back amid skepticism that stocks have further to climb—or that they are so confident they feel no need to sell. Either way, the decline in equity volumes is another piece of bad news for banks, already beset by a steep falloff in fixed-income trading revenues.”
Then again…maybe all those who were going to buy have bought and those who think it’s merely a bubble created by the central banks have left it too long to overcome their cynicism. This appears to be the view of Randy Frederick, vice president of trading & derivatives at the Schwab Center for Financial Research. “Many people are already in the market, and if things they own are going up and making money, there’s no reason to sell,’ Mr. Frederick said. ‘And if you were sitting on cash, coming in now is pretty late to the game.”
If that’s the case, we might be running out of buyers, but does it leave a few shorts who’ll still need to cover?