The general babble these days has been one of disillusioned hope in stocks. Today, in particular, has witnessed a series of articles that essentially say the same thing- what the @#%$?
Herb Greenberg puts it pretty bluntly:
Could this be the most hated stock market rally in history? Not only do traders not like the market, the average public doesn’t believe the stock market is rallying.
Yet it is. The S&P 500 Index is up 12.9 percent, one of the best year-to-date performances in a while.
The S&P 500 less than 1 percent from a four-year high. NYSE short interest is near a five-year peak, which is a decent contrarian indicator.
There’s been a lot of commentary on what’s contributing to this market, largely focused on investor sentiment and macro headlines. Recent due diligence conversations with several CTAs got us thinking, though – maybe we should be thinking less about what’s driving it than who.
We compared the 12 month rolling volume on the S&P 500 to its performance, starting in 2006:
What’s interesting in looking at this chart is that volume dropped off sharply after the March 2009 low, and is down roughly 50% to date. That means the bulk of the “recovery” has been fueled by a much lower volume market than the one that led up to the crash.
Now, to be fair, low is a relative term – this is still one of the most actively traded markets in the world. However, it does make you think. In many ways, you could view the numbers as the manifestation of lower investor confidence. Lower volume cannot explain away all that ails the markets (Josh Brown did that for us), but it could be exacerbating the macro headlines’ impact, and should make us pay a little more attention to the potential impact of HFT on long-term market integrity.
But, for us, the recent rally back up towards 4 year highs without confirming volume has us wondering, just like all those other rally “haters” mentioned above, whether this is real. Thing is, we’re not going to wait to find out. We’ve said it before and we’ll say it again – the time to diversify is BEFORE the market crashes, not afterwards. Then again, maybe all we’re talking to is the HFT machines, with all the individual investors having already headed for the exits. The volume sure looks that way.