"Myth of the Missing Market Volume"

There is an article titled ""Myth of the Missing Market Volume". The author states that "many question the legitimacy of any rally that comes with less volume than a preceding decline". But he takes a slightly different approach. "I think the decline in volume in equity markets is predominantly a good thing that portends more upside for the stock market". This is in agreement with previous post in which it is estimated that the market would drift upward gradually if the trading volume remains low. The author expresses another point that he "think different volume metrics provide a much clearer and more important snapshot of the state of our economy than equity market volume."

"There are several reasons for this relationship. On the way down, many with long equity exposure use market instruments to conduct their selling. It’s impossible to sell multi-billion baskets of stock easily, so these sellers turn to futures markets to hedge their long exposure with shorts. Next is the fact that when fear generates selling, selling is done for selling’s sake and people panic out. When the panic is done, those very same sellers don’t panic back into markets. They slowly and steadily accumulate individual positions which they like most. In that regard, it’s far more helpful to look for volume spikes in individual stocks than it is in the market at large, and those are plentiful in this September rally."

"Well there is one volume indicator making significant highs: in both July and August, global M&A volume registered new monthly highs unseen since tracking began in 1995. That trend will continue as companies look to deploy the cash hoarded during the crisis in a strategic manner. The IPO market has looked particularly good lately, with innovative new companies looking to tap into public capital markets and venture capital firms looking to lighten up on positions bought in the time leading up to the financial crisis. This fall boasts an impressive lineup of IPOs that should awaken investors animal spirits."

It is interesting to note that the comments are mostly negative on equity stock market outlook. It has been mentioned in earlier posts that many individual investors stay on the sideline during the rally from bottom last year. Since both the decline and bounce are fast, many stocks sold near the bottom are not purchased back to preserve the portfolio value. As a result, many individual investors and amateur traders lose significant portion of their wealth.

The equity stock market is a wealth creation/destruction as well as transfer tool. The majority of individual investors who become panic during the financial crisis suffer from loss of wealth. However, a minority would benefit from transfer of wealth.

A small portion of individual investors remain holding cash or equivalent. Some are buying treasuries and bonds. However, the majority of individuals still have a portion of their wealth in the form of equity stock holding either in their account or through mutual fund. And the net worth is accumulating.

As a result, many individual investors switch to the passive investment strategy. The swing in market is only a paper loss or profit. They are not panicked by decline nor excited by rally. They are wise enough not to sell their holdings less than the worth. Also, they are afraid of market wild oscillation and not greedy to chase for profit. They feel comfortable to see slow recovery (for holdings prior to financial crisis) or appreciation (for holdings after financial crisis) in their portfolio. Therefore the trading volume is relatively low compared to the figure during financial crisis or before.

However, technology is driving the living standard of human beings. The accumulation of wealth is in the form of physical property such as gold, real estate, equity stock, etc. In the current market environment, from the perspective of a speculative trader, a low trading volume would be beneficial to the stock price. An opportunistic trader can be benefited with adequate mitigation of risk.

The speculative investment portfolio maintains the holding on stock equity and changes to a neutral position in leveraged ETFs holding. It is prepared for quick profit making if the market exhibits volatility. Market dynamics may change significantly in relatively short time. The strategy for speculative stock trading would take into consideration of market environment, participants sentiment, capital flow, etc.