Saturday, August 28, 2010

Declining Volumes In U.S. Stock Market - What Does It Mean?

It is clearly evident that since early May 2010 there has been a marked downward trend in volumes in both the S&P 500 and Dow stock indices. Oddly enough, year-to-date the statistic reached a peak of approximately 7.1 billion shares traded on both the S&P 500 and the Dow—albeit almost 2 weeks apart (4/27 for the S&P and 5/10 for the Dow). The fall appears to accelerate during the month of August. This is not at all a surprise, given the high number of traders/asset managers who take holidays during the month. Nevertheless, the stock market cannot take a sustained upward turn unless the aforementioned trend reverses. In other words, volume must increase for a genuine up-tick in the market to occur. However, it is worthwhile to note that volumes, in and of itself, cannot generate an upswing. It must be accompanied by an expectation that economic conditions will improve and hence corporate profits will also increase. This assumption appears quite tenuous at the moment.

That said, it is worthwhile to note that, as the data show, the stock market can increase along with declining volumes. This is because a higher value in stocks is generally expected by the market. Therefore, lower volumes theoretically represent scarcity, which buoys prices and perceived value. Of course, this is under the assumption there is such a thing as value, which at this time it is being artificially maintained.

Unfortunately, I am not able to upload the charts I created via Excel which demonstrate the evolution of stock market volumes. However the reader can independently perform my analysis. Simply go to and download the Dow’s and the S&P 500’s “historical prices” data in a spreadsheet, after which you can manipulate the data (by taking 10-day average volume) to obtain my figures.

There is no question that a severe stock market correction is coming. However, it is particularly difficult to predict the specific time it will come. However, we can be assured that as each day passes by we are getting closer to the day of financial reckoning.

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