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Why You Shouldn’t Worry About Tepid Volume

First-10-day volume at its lowest point since 2007. So?


The market might be up for the year, but the trading gurus and the media alike are getting a little anxious about the fact that volume is low. Real low. In fact, the first 10 trading days of this year are the lowest we’ve seen since all the way back to 2007.

What the pros say: It’s a sign that traders have sworn stocks off — at least actively trading them — until it’s clear there’s more benefit than liability in being in the market.

What I say about what the pros say: You think?

The suspected reasons for the trading lull are plentiful, and the likely longevity of the hiatus is varied. But just so we can all get a firm grip on where we’re headed and when we’ll get there, let’s share each one of those opined reasons (with my plain English translation as needed). And more importantly, I’m going to deflate the worry the financial-media machine is trying to generate.

Take Your Pick

Why is trading interest so low now? Possibilities include:

  1. Investors want to see if tax breaks will be extended into 2012.
  2. Investors want to see which party — and which candidate — ends up taking over the U.S. presidency. (Translation: Once again we’re faced with the challenge of trying to find someone who is at least partially pro-business, but someone who isn’t the weekly featured-spoof on Saturday Night Live.)
  3. Investors want to see that earnings are going to continue growing.
  4. Investors want to see that Europe isn’t destined for fiscal failure. (Translation: At least in the United States, lawmakers, leaders and bankers use the 11th hour to steer clear of financial disaster and avert political suicide. In Europe, these guys will scuttle the ship even if its capture isn’t exactly imminent.)
  5. Investors want to see stock prices at least pretend to reflect some sort of performance-based value. (Translation: A disconnect between stock prices and stock values isn’t anything unusual, but it’s also usually temporary. For the bulk of 2011, however, stock prices were apparently driven by a monkey spinning a roulette wheel.)
  6. Investors are just plain-old tired.

Here’s the deal: It’s not one of them that’s putting the kibosh on activity. It’s all of them. Of the six, though, I think it’s reason No. 6 — the simplest of them all — that’s really the root of the sleepy open to 2012.

Since the bottom of the August tumble, the market has “traveled” (between major tops and bottoms) a total of 54%, but has only made net progress of about 15%. That’s a lot of ups and downs, and a lot of fake-outs. The direction is irrelevant. Traders can only take so much time on a roller coaster before they want to get off. They’re now getting off. I can’t say I blame them. Before you get too comfortable on the sidelines, though …

Fear Not

Yes, it’s a tepid environment, and one that has the professionals concerned. As Oppenheimer banking analyst Chris Kotowski said in no uncertain terms, “The equity business may well be done forever.” Yikes, though given the low-volume start to the new year, it doesn’t seem impossible.

When you take a step back and really examine it, though, the “lowest 10-day volume start” is a slightly pointless statistic, and the sentiment behind the dwindling volume doesn’t tell the whole story.

To that end, two realities need to be shared:

  1. Volume has been trending decidedly lower since it peaked in March 2009. The only thing the tepid volume during the first 10 days of 2012 means is that this downtrend has been extended. That’s not to say it’s a bullish clue, but why is it a big deal now? Said another way, is there any empirical evidence that weak volume early in the year actually leads to trading doldrums? No. At least none I could find.
  2. The assumption that traders are calling it quits once and for all grossly underestimates the average human’s greed, and grossly overestimates the average human’s memory. People aren’t getting out of the market because there’s no money in it. They’re just waiting for more clarity, which improves the odds of making money.

The aforementioned issues are just a little more than most folks can process right now. But once two or three of those drags are lifted (and they will be eventually), volume’s going to perk up again as people forget about the past and focus on the next round of starry-eyed dreams.

It’s a cycle that’s been playing out for years, and there’s no reason it’ll stop now. It sure didn’t in 2001 and 2008 anyway, when the same “trading is dead forever” assumptions were being made.

Article printed from InvestorPlace Media,

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