The stock market has changed. The change is a subtle, yet unmistakable shift in volume patterns. In February, I will be conducting an educational webinar discussing this subject and also some examples of how a coach helps individual traders deal with the coming market conditions. (Watch this space for upcoming news about how to participate!) What conditions am I referring to?
The headlines from the Eurozone seem ever more daunting. The latest development—a Hungarian prime minister who seems willing to entertain national bankruptcy—seems both unanticipated and likely to spread fear into the hearts of sovereign bond investors. After all, where is the “H” in PIIGS? Hungary wasn’t supposed to be one of the problem peripheral countries on which the mainstream financial news media had to keep watch. Nonetheless we now read news stories spelling out the implications of such a decision by Hungarian officials. These implications are that bondholders may simply be required to lose money; starting with those who invested in Hungary.
There are those who worry that such a decision could trigger other countries to behave similarly; Italy, for one example, and Spain for a second. These same writers worry aloud that such a thing could start the largest countries considering that path.
A slippery-sloped, camel-nosed, collapsing big tent?
Once that way out of the crisis becomes acceptable, goes the logic, then even countries with world-class debts might think it better to simply wipe the debts away by declaring bankruptcy. Would Japan, for instance, consider doing so? Would the US? If bond buyers thought G8 bankruptcies were likely, then all markets should be in a full scale panic about now. But they are not.
It appears as though the U.S. stock market is ready to hang on and hope for the best. Perhaps it is because astute stock investors and traders believe that if the bond market collapses, then whatever money is left has to go somewhere—perhaps into stocks? That’s my speculation for explaining this year’s anomalous volume readings in SPY.
Consider the following figure and facts:
Trading volume noticeably declined through December. This has been a typically observed phenomenon over the past 10 years, but what is also typical is that the first two weeks of January show starkly increased trading activity by comparison. Over the past decade trading volume increases by 90% on average when comparing the late weeks in December to the early weeks in January. But this year the increase is on pace to match the lowest year in the decade (2006-2007) at only a 55% increase. That year, though turbulent, was more bullish than bearish. Is it possible that 2012 could hold such a roadmap? Given the market’s shoulder-shrugging reaction, both in volume and in direction, to the worst financial and economic harbingers being trumpeted in the past three decades or more—it may be so.
So is it a wall of worry or complacent walk up the stairs?
Bullish markets tend to trade with lighter volume than bearish markets. Bullish markets tend to create less volatility and less anticipation of volatility. Paradoxically this has been alternatively interpreted by pundits as both worry and complacency on the part of investors.
But perhaps a better read would be that of market pragmatism; a simple settling for a given price as an uneasy and temporary equilibrium. If the equilibrium is prolonged for lack of additional information then the markets, like the individually impelled humans that comprise them, may become accustomed to the condition. This level of uncertainty could eventually become the new normal, forming a base from which prices could then rise if conditions improve in any way.
If it weren’t so, wouldn’t trading volumes and volatility be greater? From December 2007 through September 2011 they were. The last 90 days of market activity have changed remarkably. This change may signal that a different market type will be the order of the day throughout 2012. Traders would do well to get ready for a weak bullish market and dust off the strategies that seemed to fare well in 2004, a year of slightly rising prices and declining volatility. (Oh, and if you don’t know what those strategies might be, then you’ll want to be certain to catch the webinar I mentioned earlier!)