Trading volume drop can't just be blamed on summer
SAN FRANCISCO (MarketWatch) -- Trading in the stock market has slowed to a somnolent pace, even after accounting for all the traders and hedge fund managers escaping to their vacation homes in the Hamptons.
Get used to it. Volumes could bump along at a below-average pace for another three weeks, as investors hang on to recent gains and avoid making big moves before what's seen as the next catalysts -- upcoming Federal Reserve and European Central Bank events.
On Wednesday, the volume of shares listed on the
It's no surprise August volumes look iron-deficient compared to a year ago. In August 2011, investor anxiety about Congress' bitter fight over raising the debt ceiling and the U.S. losing a triple-A rating led to intense swings on the indexes and a surge in trading volumes. Read recap of August 2011's wild ride.
But even compared to prior Augusts, volume has been slight. NYSE composite volume is on track for its lowest month since December 2007 and its lowest August since 2006, according to the Wall Street Journal's data group.
For stocks listed on the
Aside from the usual summer doldrums, a lack of fresh incentives, consolidation in the wake of robust gains over the past couple of months and uncertainties over what, if any, action policymakers in the United States and Europe will take to jump-start their economies, are keeping investors mostly in the wings.
Since the recent lows in early June, the Dow Jones Industrial Average (DJIA) has gained 9% while the S&P 500 (SPX) and the Nasdaq Composite (COMP) each added about 11%.
"If you're pessimistic and wonder how long the rally can continue, the fact that [volume] has been anemic is another reason to be cautious," said Michael Sheldon, chief market strategist at RDM Financial Group. "Investors are uncertain as to whether they should chase the market higher."
In tandem with razor-thin volumes, the CBOE Market Volatility Index (VIX) fell to a 6-year low earlier this week, signaling both complacency and a sell-off in risk assets, Michael Derks, chief strategist at FxPro, said in a note to clients.
The so-called fear gauge closed at 13.70 on Monday but has since crept back up above 14 to finish at 14.63 on Wednesday.
Market players had bid up stocks after European Central Bank President Mario Draghi in late July said the institution is ready to do "whatever it takes to preserve the euro."
Expectations that the Federal Reserve would introduce further easing measures when the Federal Open Market Committee met July 31-Aug. 1 also lured in stock buyers, although the hoped for stimulus did not materialize.
For now, investors are taking advantage of the lull to regroup, said Michael Gibbs, co-head of the equity advisory group at Raymond James.
"In the next couple of weeks, we'll start to get more details on what [the Fed] has in mind for bond-buying, we'll have more economic data under our belts, then activity will definitely pick back up," he said.
September wake-up
In contrast to the lethargy of August, September promises more action and by turn, more risk, analysts at Morgan Stanley Research said in a report.
Officials from the European Commission, the ECB and the International Monetary Fund will return to Greece in early September while the German court is slated to rule on the constitutionality of the European Stability Mechanism on Sept. 12.
Closer to home, the Federal Reserve will convene at Jackson Hole in late August for its annual retreat ahead of the FOMC policy meeting schedule for Sept. 12-13.
But a string of healthier economic data in recent weeks has led some forecasters to predict that the central bank could defer additional expansionary measures, preferring to horde its ammunition. Goldman Sachs told clients earlier this week that recent data just isn't weak enough to prompt "a substantial easing move." Read more on Goldman, QE3 forecast.
Wednesday's data provided more support to analysts who say the Fed will hold off. The National Association of Home Builders/Wells Fargo housing market index rose 2 points to a seasonally adjusted 37 in August, the best since February 2007. Read more on home builders.
Industrial production rose 0.6% in July after 0.1% monthly gains in May and June, the Fed said. Read more on industrial output.
"If you look at some of the recent data, including last month's jobs report, weekly jobless claims, today's manufacturing activity and recent housing numbers, you could make the argument that the Fed should remain on the sidelines," said Sheldon.
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