Stocks are being traded at low volume level recently, regardless of movement direction. Market participants are constantly shifting their investment criteria according to market environment. The low trading volume in equity market is partly due to the increased proportion of bonds and treasuries in private funds. The lack of interest from retail investors is also a contributing factor.
Although the trading volume is low, it seems that many people, including stock analysts, fund managers, individual investors, etc. express pessimistic sentiment on the near-term market. Market makers have been successful to advance the stock after the bottom is reached in March 2009. However, few individual investors ride on the rally until near the end. Thus they do not profit much from the initial rally. From late 2009, the stock market seems to reach a level which is difficult to advance further.
Scared by the steep market decline during the financial crisis, many retail investors prefer to sit with cash on the sideline rather than to take risk on another dip in the market. However, the rally is missed and the low yield of CD is annoying. Therefore the more aggressive retail investors among them are looking for an entry point into the market. A large and extended dip in the market would make an opportunity. Although not fully invested in equity market, many still have some positions to a certain extent. They still enjoy the appreciation if the market moves up. But they are not ready to jump in until the previous bottom is reached or near.
On the other hand, there are some traders who see the equity market as undervalued. Due to the overall pessimistic sentiment and market risk, they are not holding the positions for long-term appreciation but short-term swing trade profit.
Market makers attempt to move the market with the pessimistic sentiment. However, the selling force cannot create a large enough downward spiral. Despite of liquidating the portfolio in a panic during the financial crisis, retail investors are now waiting to enter the market. At current market level with small decline, they are not going to take the risk to increase the portfolio holding. However, some day traders will jump in after a small decline. If the selling force is limited without panic selling, the market can find a support without significant decline.
In conclusion, the risk of significant market decline is relatively small in the present moment. Buy low and sell high in a bounded range should be an appropriate strategy. However, the behaviour of market participants may change abruptly and cause significant change in market movement. Therefore the speculative trading portfolio is monitored constantly and should have buffer to cope with unexpected market reversal.
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