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The Missing Volume

The Missing Volume

By Ilene

The Missing Volume
Interview with Nicolas Santiago
Who Is Responsible For The Non-Stop Market Rally Since March?
Zero Hedge reports on Evaporating Market Liquidity
The Big Picture’s Barry Ritholtz’s Disbelief in Conspiracies
Are retail investors and non-professional stock market traders still actively involved with investing and trading their accounts?  Phil sent me an article on the subject, “Where Has All the Volume Gone?” by Nicolas Santiago at his Rant and Rave blog, and I called Nicolas up to talk with him about it.    
As background, Nicolas teaches stock trading and is an expert in technical analysis. He’s been trading stocks since 1991, watches the market daily, and is an accomplished technician in the studies of Elliot Wave, Gann Theory, Dow Theory and Cycle Theory. In 2007, he partnered with Gareth Soloway to form InTheMoneyStocks.Com. Currently, he trades and teaches his stock trading methods. 

The Missing Volume – with Nicholas Santiago 

Nick writes in Where Has All the Volume Gone?   

Let’s say the market is in an economic recovery and the financial crisis is behind us. Normally one would expect the trading volume in the stock market to increase. This has not been the case. Volume for the month of November and December 2009 have been lighter than August of 2009. Remember August is notoriously the lightest trading month of the year. Hence the term ‘summer doldrums.’ January is usually a very high volume month, yet it has started off the New Year even lighter than the last two months of 2009.
Light volume markets are very difficult to short. Hence the old saying, ‘never short a dull market’. This is as dull of a market as we have seen in many years. While there are some stocks such as Apple (NYSE:AAPL), and Amazon (NASDAQ:AMZN) that have traded with respectable volume the bulk has come from government owned names. Stocks such as Citigroup (NYSE:C), American International Group (NYSE:AIG), Fannie Mae (NYSE:FNM), and Freddie Mac (NYSE:FRE), have often accounted for one third, and sometimes half of the daily volume on numerous trading days. 
Ilene: Nick, why do you think volume is so low? 
Nick: The public is out of the market, for the most part. Look at Schwab’s recent earnings. In a healthy market, as it’s going up, you get heavy volume. We’ve now gone straight up, on low volume, without any meaningful corrections. These are not normal movements for a bull market. It’s not healthy to move up on low volume – this is the opposite of what you would see in a true bull market.
But on down days, we do get heavy volume. The market is trading as though someone is propping it up, someone doesn’t want it drop.
Even today (1-19-09), the market rallied up on the lightest volume. I think one or two institutions are moving the market.
There’s also huge volume in several largely government-owned stocks, such C, FNM, FRE, and AIG. These are only four stocks in a market which has thousands, yet you can see a small group of stocks accounting for sometimes half of the daily volume.    
Who would buy these stocks to own, who would buy Citi? It’s government run, with a $75B market cap – humongous, and it’s probably not even worth zero.   
Ilene: How do you know there are one or a few institutions in the market trying to keep it up?
Nick: We don’t know for a fact. However, when markets trade higher on light volume it is usually just a few institutions involved. Heavy volume means many institutions are involved.
Ilene: How do you know when the market’s going to be “propped up”?
Nick: Chart patterns. I can see when the buy programs kick in and can almost predict it by watching the charts. You can catch the market tipping its hand, and that’s in the chart patterns you get familiar with. You can see the buy programs better in GS and in AAPL than in smaller cap stocks. 
Ilene: Is the government involved in manipulating the market?
Nick: I don’t know. There are definitely large forces in the market. The government certainly interferes and has an effect. 

Ilene: What do you think the market will do through the rest of the year?
Nick: This market reminds me of the top in 2007. In 2007 the market had three panics – all with very heavy volume sell-offs. But volume on bounces leading up to the October top was light. When markets trade higher on light volume it’s very concerning.
This year, 2010, is not going to be like 2009. I think this will be a negative year, maybe 15-20% down. I don’t think there’s any economic recovery. It’s a traders market for the next 10 years. The consumer won’t be spending. The system doesn’t work. They’re inflating the market to make it look good. The plan is to inflate the market up to apparent health, but it’s going there on the back of the dollar going lower.
I don’t see the S&P going past 1178. At least one more bounce back higher, probably in early to mid February. These bounces should give good shorting opportunities.
What makes capitalism work is fail, and they don’t let anyone fail now. 
Here’s Nick’s chart of the volume on SPY. Notice the decline over the last year:
Ilene: What should the volume be around this time of the year compared to what we’re seeing now? 
Nick: Well, the volume should be stronger and is actually now since this correction began on January 11, 2010. I don’t remember when the overall volume was lighter in November and December than in August. Something is wrong with that.
Ilene: Do you think High Frequency Trading [HFT] has an effect on the overall movement of the market? According to the Celent chart, HFT accounts for about 42% of all trading and they expect that to continue increasing.
Nick: I’m really not sure about the HFT. It has not really effected me personally in the past nor the present.
The following chart, from a report by Celent, shows how high frequency trading (HFT) is increasingly comprising a greater portion of market activity. It seems to me that as total volume is declining, and HFT trading is increasing, non-HFT would have to be declining as well.

Demystifying and Evaluating High Frequency Equities Trading: Fast Forward or Pause? 

High frequency trading of equities has been a growing trend for some time, though the topic has been rediscovered of late. Enabled by regulatory change, an evolving market structure, and technological innovation in the trading arena, HFT now constitutes about 42% of daily US equities share volume and is expected to exceed 50% by mid-2010…

"Adoption of HFT will be driven by an expansion of quantitative hedge fund strategies and the growth of proprietary trading firms," says David Easthope, senior analyst with Celent’s Capital Markets group and coauthor of the report…  


This chart indicates that algorithmic trading of equities is now approaching 50%.  It was less than 30% in 2004. Algorithmic futures trading has increased even more, from less than 10% to nearly 40%.  

In the following excerpt from an article, by Charles Biderman of Trim Tabs, posted at Zero Hedge, Charles discusses where the money to pump up the US stock market by $6 Trillion dollars may have come from. 

TrimTabs Asks: Who Is Responsible For The Non-Stop Market Rally Since March; Gives Some Suggestions 

Are Federal Reserve and U.S. Government Rigging Stock Market?  We Have No Evidence They Are, but They Could Be.  We Do Not Know Source of Money That Pushed Market Cap Up $6+ Trillion since Mid-March.

The most positive economic development in 2009 was the stock market rally. Since the middle of March, the market cap of all U.S. stocks has soared more than $6 trillion.  The “wealth effect” of rising stock prices has soothed the nerves and boosted the net worth of the half of Americans who own stock.
We cannot identify the source of the new money that pushed stock prices up so far so fast.  For the most part, the money did not from the traditional players that provided money in the past:

  • Companies.  Corporate America has been a huge net seller.  The float of shares has ballooned $133 billion since the start of April.
  • Retail investor funds.  Retail investors have hardly bought any U.S. equities. Bond funds, yes. U.S equity funds, no.  U.S. equity funds and ETFs have received just $17 billion since the start of April.  Over that same time frame bond mutual funds and ETFs received $351 billion.
  • Retail investor direct. We doubt retail investors were big direct purchases of equities.  Market volatility in this decade has been the highest since the 1930s, and we no evidence retail investors were piling into individual stocks.  Also, retail investor sentiment has been mostly neutral since the rally began.
  • Foreign investors.  Foreign investors have provided some buying power, purchasing $109 billion in U.S. stocks from April through October.  But we suspect foreign purchases slowed in November and December because the U.S. dollar was weakening.
  • Hedge funds.  We have no way to track in real time what hedge funds do, and they may well have shifted some assets into U.S. equities.  But we doubt their buying power was enormous because they posted an outflow of $12 billion from April through November.
  • Pension funds.  All the anecdotal evidence we have indicates that pension funds have not been making a huge asset allocation shift and have not moved more than about $100 billion from bonds and cash into U.S. equities since the rally began.

If the money to boost stock prices did not come from the traditional players, it had to have come from somewhere else.
We do not know where all the money has come from.  What we do know is that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers.  Why not support the stock market as well?
As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures.  Moreover, several officials have suggested the government should support stock prices.  For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.”  In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures.  The official mentioned that the Fed could “theoretically buy anything to pump money into the system.”  In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”…
One way to manipulate the stock market would be for the Fed or the Treasury to buy $20 billion, plus or minus, of S&P 500 stock futures each month for a year.  Depending on margin levels, $20 billion per month would translate into at least $100 billion in notional buying power.  Given the hugely oversold market early in March, not only would a new $100 billion per month of buying power have stopped stock prices from plunging, but it would have encouraged huge amounts of sideline cash to flow into equities to absorb the $300 billion in newly printed shares that have been sold since the start of April.
This type of intervention could explain some of the unusual market action in recent months, with stock prices grinding higher on low volume even as companies sold huge amounts of new shares and retail investors stayed on the sidelines. For example, Tyler Durden of ZeroHedge has pointed out that virtually all of the market’s upside since mid-September has come from after-hours S&P 500 futures activity.

If we were involved in a scheme to manipulate the stock market, we would want to keep it in place until after the “wealth effect” put a floor under the economy of, say, three quarters of positive GDP growth.  Assuming the economy were performing better, then ending the support for stock prices would be justified because a stock market decline would not be so painful.

We want to emphasize that we have no evidence that the Fed or the Treasury are throwing money into the stock market, either directly or indirectly.  But if they are not pumping up stock prices, then who else is?  more here.>> 

Today, Zero Hedge reports again on the loss of liquidity in the market.  This is an ongoing phenomenon.

Zero Hedge reports in Vapor Volume Resulting In Major Swings Indicates Evaporating Market Liquidity  

We keep harping on the lack of volume to the upside, and inversely the massive flushes on every down draft. This is due to basically no real money buying, but very real money selling on any appropriate catalysts. So who does the buying? And how does vapor volume manage to push the market by nearly 1%, usually higher? Simple – there is no liquidity left at the margin for the entire market! Market neutrals lost the war… And the results will be forthcoming soon. Some terrific insight from Art Cashin.

S&P Again Stalls At Resistance – For the second day in a row, the bulls tried to punch through the S&P resistance at 1102/1106.  Monday, the attempt flamed out at 1102.96.  Yesterday, they made it all the way to 1103.69.  That failure was followed by a rather rapid evaporation of the rally with all three indices closing down on the day.

The indecisiveness in the stock market has led to relative illiquidity.  With more players on the sidelines, market moves can be disproportionate to the volume involved.

Tuesday morning, about 10:00 a.m., the Dow had a sudden sharp 70 point swing.  It was over in a minute or two.  Floor traders were astounded to notice that the 70 point reversal saw volume jump only 15 million shares.  That move, on such small volume, was stunning and indicates that liquidity is well below the norm.

While there was some news and data yesterday, the markets seemed self-absorbed and somewhat hypochondriacal.  It kept checking its own pulse and temperature to see if it felt well enough to rally through the resistance.

Around 1:00, they made their first real try but stopped on a dime.  They pulled back, rested and tried to regroup.  Around 2:00, they failed again at virtually the same spot.  Having failed twice, they just gave up.

Another problem for the bulls was that the volume ticked up slightly as prices fell.  Low volume rallies that devolve into higher volume sell-offs are not a good sign.  That made the close seem a bit gloomier.

To present both sides of the controversy, Barry Ritholtz on his blog The Big Picture commends Barron’s Mike Santoli for "politely and quietly," with language fit for a G-rated movie, taking on Charles Biderman for his "clueless commentary about government cabals." 

Barron’s Santoli: Biderman is Clueless 

[Mike Santoli writes in Barron's:]

“One conspiracy theory gaining undeserved traction on Wall Street lately holds that the Federal Reserve or another government entity might — or must — have been a buyer of stocks or stock futures during the run higher off the March lows.

A report by fund-flow research firm TrimTabs Investment Research a couple of weeks ago intensified the usual conspiracy chatter in the blogosphere and across trading desks, suggesting the Fed might be goosing stocks because publicly observable fund flows (via mutual funds, corporate buyback plans and insiders) seem not to be able to account for the 70% gain since the March bottom. Aside from the observation that theories that assign blame to unseen forces are inherently the laziest of all possible explanations, there are many problems with this assertion.

Fund flows don’t capture changes in positioning by hedge funds, mutual funds, pension funds, individual stock buyers, foreign capital and others. The fact that long-short hedge funds outperformed the Standard & Poor’s 500 both into the lows last year and for all of 2009 shows hedge funds went from substantially hedged/short in the deleveraging phase to very long.

More broadly, why would the Fed have to buy stocks, with all it has openly done to penalize risk aversion by adding reserves to the banking system, setting short rates at zero and buying credit products and Treasuries? The whole asset spectrum has fed off these initiatives.”
(emphasis added)

[Barry writes:]  Mike is a nice guy, and way too polite to write anything nasty — so I will add what he is implying. Outside of fund flows, Biderman’s track record is mediocre at best.

Further, the rise of hedge funds, dark pools and private trading networks means that there is much less volume information available for fund flow analysis — which is TrimTab’s bread and butter research.

So its no surprise that Biderman missed the turn, and has remained on the wrong side of the market’s 70% rally…more here.>>   

I would have to disagree with the focus of Barry’s reasoning which seems to be that Charles missed the rally. Not a cause for celebration, but not really the issue.  Whether Charles’s suspicions are correct is another matter.  In the excerpt above, Charles states: "We want to emphasize that we have no evidence that the Fed or the Treasury are throwing money into the stock market, either directly or indirectly.  But if they are not pumping up stock prices, then who else is?"  Seems like a legitimate question.

Just in from Zero Hedge is a report that margin levels are currently higher than ever:

Margin Debt Increases By 30% In 2009, Currently At $231 Billion

The NYSE’s most recent disclosure of margin debt indicates a surge in trading in margin accounts, where total debt shot up to $231 billion as of December, up $58 billion from February or 30%, and also an increase of 4.5% from November. This is an indication that "animal spirits" have surged by about the same amount as the broader market since the market lows: in other words, speculation is now rampant, and, to make things even better, is very much on margin, or leveraged. And we all know what happens when levered speculative bets turn out not quite as expected. For those who may be confused, Dow Jones provides a useful primer of how a margin call feedback loop tend to make things ugly, fast.

A potential pitfall for those trading "on margin" is a sharp decline in stock prices, which can expose investors to margin calls, requiring them to post additional collateral lest their brokers sell their securities to cover the debt. A wave of margin calls can worsen selling pressure on stocks and was seen as partly to blame for the market’s woes in the fall and winter of 2008-09…

So maybe one question is whose animal spirits have surged?    

In summary, many long-term market participants believe that this market is being held up in an unusual and unnatural manner.  Trading patterns, such as low volume market rises and high volume declines, and the use (misuse) of after-hours trading to generate most of the past year’s rallying ascent, support Nicolas’s assertion that normal market forces and the public are largely absent from scene.  Larger forces have increasingly taken over.  What or who are these larger forces?  I don’t know.  Lacking the ability to find precise and reliable numbers to study, and the expertise to examine what I do find, I defer to others to propose what is behind the market’s odd behavior.  Any feedback on the subject much appreciated. 



Where Has All the Volume Gone? By Nicholas Santiago at In The Money Stocks 

High Frequency Trading Chart: Demystifying and Evaluating High Frequency Equities Trading: Fast Forward or Pause? Report by Celent. 

TrimTabs Asks: Who Is Responsible For The Non-Stop Market Rally Since March; Gives Some Suggestions, at Zero Hedge.

Vapor Volume Resulting In Major Swings Indicates Evaporating Market Liquidity, Zero Hedge.

Barron’s Santoli: Biderman is Clueless, The Big Picture

"Rise ( & Fall ) Of The Machines" …  Jan-Martin Feddersen at Immobilienblasen


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