As we wind down the dog days of summer, I am hearing a litany of complaints: volatility is low, the markets aren’t moving, volume is pathetic, the action is too thin to trade.
I can certainly understand the concerns, but trust me – we don’t want to turn up the volume. Let’s take a look at current market conditions and why volume is exactly where it needs to be.
Complacent markets, weak volume, and rising markets
With a VIX settled in at just under 14% for nearly two months now, we have a sleepy market on our hands. Additionally, we are trained to believe the markets are vulnerable to downside when participants show complacency, and that has certainly been the case since the Brexit vote in June.
But what has been truly remarkable about the markets this summer is that they have risen to new heights despite extremely weak volume. Just last week, the Nasdaq 100 clocked in at the lowest volume day ever for a full session, with just under 10 million shares traded. The average level of volume for the biggest indices (SPX, Russell 2K and Dow Industrials) has also been declining steadily. The 50 day moving average has not had an uptick in several months, and when it did, the market was declining.
A “wall of worry” is in place, as it should be
Conventional wisdom holds that as markets make new highs, more money flows in. In reality, this is not necessarily true, and frankly, if that were the case, it would scare me right out of the markets.
Instead, we like to see what is known as a “wall of worry,” or healthy skepticism that keeps some traders out of the markets – which is exactly what we have on our hands right now. (If everyone was in, there would be nothing left but sellers, and prices would go down as supply started to exceed demand.)
We also like to see high volume surges after big price drops, which indicates some players have basically given up.
What we don’t want to see is a repeat of the dot-com bubble and its subsequent painful bust, which happened when the wall of worry evaporated.
As you may recall, from 1998 and into 2000, there was a persistent bid in the markets. At one point, the Nasdaq was up a staggering 80% over a four month period as money was coming into the markets from all corners of the Earth. Nobody wanted to miss out, but when it was all over, there was blood everywhere. Not many were left standing, and that included short sellers who got blitzed when the markets ran them over before the crash ensued.
If you find yourself worrying about the markets, keep in mind that they are set up to make most everyone look foolish at some point. Following the crowd may feel good, but it is generally not how the money is made. When you see big volume at the highs, then watch out below! A fall is going to happen – fast.
Copyright: maryart1 / 123RF Stock Photo
