Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
EQ: In our recent interviews, we’ve discussed how investors have been somewhat reluctant to buy into this current bull market. One sign of that may be the weaker than usual volume—which you covered in this week’s Sector Watch report—that we’ve seen during this period. How low has volume been from a historical standpoint?
Stovall: The interesting thing is that absolute S&P 500 volume itself, which has been growing from as small as 2 million shares per day in the early 1950s to an average of 4 billion shares per day today, has continued to grow. However, we seem to have plateaued and have even started to come down a little bit. We’re finding that, on a rolling 12-month basis, the average annual volume today is nearly 15 percent below where it was a year ago.
Also, we’re finding that we’ve been pretty much in a downtrend since the prior bull market, which ended in October 2007. We had a bit of an uptick from March 2009 into 2012, but we’ve headed lower once again. We’re now looking at negative year-over-year changes in volume in 36 of the last 39 months.
EQ: July has been traditionally a slow month for the market, but should investors brace for a significant pickup here on out?
Stovall: The market does tend to show seasonality, not only in terms of share price performances but also in average volume. Going back to 1950, the lowest volume as a percent of all of the volume in that particular year was seen in July and whereas the highest occurred in December. I even looked at it by separating bull markets and bear market, and again, July ended up showing the lowest percentage of volume in bull markets as well as lowest percentage of volume in bear markets.
December, however, tended to show the highest levels of volume overall, as well as the highest volume in bull markets. Surprisingly, September ended up being the best in volume during bear markets. I think a lot of that has to do with September being the worst month of the year on average, and in bear markets, we tend to think they bottom in October. Five of the last 10 bear markets ended up fizzling out in October, and much of those final pushes have usually taken place in the month of September.
EQ: For traders, volume serves as a confirmation of a trend. From an investing standpoint, would a surge in volume serve the same purpose for the prospects of a new bull market?
Stovall: Volume usually ends up being a confirmation of investor sentiment. Usually, if it’s a downward move, that’s not necessarily bad, and if it’s an upward move, then it’s good. The reason is because it shows conviction one way or another. Usually, in a downward move, what you are doing is looking for a “capitulation day” where those people who are likely to throw in the towel end up doing so. Typically, a very big spike in volume and a very big spike in volatility are signals that we are getting close to an end of a decline rather than the beginning of one.
However, when volume starts to pick up as share prices advance, it’s a sign of increased confidence that the rally will be sustained. Of course, we also need to get other confirming factors such as broadening breath, meaning a greater number of companies or industries to participate in the rally.
EQ: So the lack of volume indicates that a lot investors are still on the fence. What do you think investors are waiting to see before that rotation into stocks will begin in a more meaningful way?
Stovall: We need to see an improvement in economic data and also in revenues. Earnings numbers are acceptable right now but they’re really not being supported by revenue growth. Investors are waiting for some sort of a catalyst to help the market break through the 1700 century mark ceiling, and turn it into a floor from which we can work our way higher. So usually it’s some sort of propulsion catalyst that moves us in one direction or another, but right now, I think investors are looking for that catalyst to help continue with this bull market advance.
EQ: Has the introduction of more financial products such as exchange-traded funds in recent years affected current volume levels as compared with previous years?
Stovall: There are other products that, in a sense, act as surrogates for the actual securities, be they the shares themselves or even the options for those shares. So as a result, you can buy these instruments without affecting the overall volume. The more exotic derivatives that are created and offered, then the more we’re going to see an impact on overall volume.