Volume: Light as a Feather

By Jerry Slusiewicz | August 28, 2008 | 2:14 AM | 2 Comments

I'll keep this short but not so sweet.  The light volume we are seeing on the market is a function of two things.  First is the topic all media is talking about - the end of summer and final vacations.  Yeah, yeah the week before Labor Day is traditionally light volume for that reason, but NOT this light!

Last year the NYSE had its lightest volume trading day on August 27 with only 1.1 billion shares traded.  This year we haven't traded even one billion shares the last eight days in a row and 9 of the last 10 days.  Today we traded only $730 million shares.  The last three days volume has been 33% lighter than the absolute lightest day last year. 

As a matter of fact the NYSE volume has not had even one day traded with under a billion shares the two weeks proceeding Labor Day in the last five years.  Light volume equals no conviction.  I believe that if you look at what happened after Labor Day six years ago, you will understand what I really think has the market participants holding back on their trading today.

According to the Stock Trader's Almanac, September is historically the worst month for the stock market.  Many folks are more familiar with the famous drops in October and mistakenly believe that it is the worst month.  One of the more gruelingly Septembers on record is that of 2002 when the Dow and the S&P 500 dropped 14% and 12% respectively.  I'm not saying that type of drop will happen, but it would be naïve not to understand that it could.

Technically and fundamentally the market appears weak.  Fannie Mae and Freddie Mac are causing an overhang on the financial and housing sectors, the two worst performers since the downturn began.  The earnings model for the US banking system is broken, with no apparent fix in sight.

Lending is tight as banks can no longer securitize and sell off (to other investors) their loans.  Due to reserve requirements they end up holding the loans and their own books and tie up their cache.  Interest rates for mortgages are higher and scrutiny for any form of lending is heightened.  Money makes the world go around and all around the world credit is getting tighter. 

The go - go days for commodity speculators has passed, meaning the last game in town is temporarily over.  Traders are on ice as they are unsure of what to do.  The globe is doing worse than the US, the tech sector still hasn't caught fire, only healthcare, consumer staples, small, and midcap companies have held their own over the last month. 

The market, like a feather, can get blown out when traders come back in force in the next week.  The government must make a decision on Fannie and Freddie before too much longer.  Whichever way they decide (to take it over, infuse cash, or privatize) investors will eventually adjust.  But uncertainty is the one thing markets don't like.  With those two GSE's holding about half of all the US mortgages, this gets at the root of the current mortgage, housing, and financial debacle that we are facing.

Investors are holding their collective breath, hoping that we don't have a repeat of September 2002.  I'm not so sure hoping is enough.  Cash is the safest place to be in this environment.  History and the current market environment are dictating that today.  It is far nobler to apply trading restraint than to take excessive risk to try to make a few dollars.  Sometimes the best trade is the one you don't make.

Ditto Solid advice as always. Submitted by Jim Slagle on Thu, 2008/08/28 - 12:01pm » reply |

Nice Article Jerry: All we need is for a CNBC commentator to say one of two things. First, they must use the "R" word. What is the "R" word? Resilient of course. As in "how resilient this market is". Second thing to listen for is when someone says, "the market is really going to take off in September when the big boys get back from the beaches." In both cases, I would run for the hills. Poor market internals in the face of neutral sentiment is not a recipe for a sustainable price move. Submitted by Guy Lerner on Thu, 2008/08/28 - 11:36am » reply |