Monday, March 18, 2013

Declining Volume in the Stock Market

MetaStock SPRS Series - Week 110 - TechniTrader® Stock Discussion for MetaStock Users - Declining Volume in the Stock Market - March 18, 2013
By: Martha Stokes C.M.T.

There are innumerable commentary and articles about how the US Stock Market is seeing a huge decline in volume in recent years. Certainly when you study a chart of the DJ-30 or SP-500 it is obvious that volumes are far below what they were earlier in this decade. Below is a chart of the declining volume in the Dow:

Chart 1

There is always cause and effect so the question is, “Why?” Are fewer people investing and trading, or are there fewer financial companies, or are the US financial markets in serious jeopardy? Even the Options Markets have had a huge decline in volumes. What is causing this steady decline? The real culprit is not that investors are not buying stocks. They are just not investing in Dow or S&P500 stocks as much as they did earlier. Keep in mind that 80% of the market activity is institutional. One huge factor is the fact that the financial markets are far more interwoven, complex, and there are far more Derivatives professionals and retail traders can trade. ETFs have been in huge demand, and have been on the rise as trading instruments for short term profits by the professional side.

Volumes traded in ETFs have been on the rise for more than 3 years now. Many funds are using ETFs or ETNs rather than investing in Dow or S&P500 stocks. Yes, mutual funds and pension funds must adhere to certain charter requirements but since the elimination of the “Rule of 3” (see the TechniTrader® Methodology ME10 course for a full explanation) the funds now can trade and move monies around with far less restrictions. More and more Hedge Funds and sell side institutions are buying and holding Dow and SP-500 stocks in trusts to create ETFs. Hedge Funds have become far more intricate, sophisticated, and unique. What we are seeing is that the big blue chip companies are being held more for charter or in trusts and less for short term trading activity, with fewer retail traders so volumes are declining. High Frequency Traders started rising exponentially in 2004 and peaked in 2009. HFT activity has steadily been declining as HFT firms reinvent and shift gears to other opportunities.

What is NOT causing the decline is Dark Pool activity aka OTC Giant Lot transactions. These companies are required to have all transactions recorded and documented through the National Clearinghouse just like the exchange transactions. Another area that is adding to the decline of volume in both Big Blue chip indexed stocks and stock Options, is the shift of retail traders from stock and options trading to Forex trading. It is not that the stock market is in decline or that there is less investing, what has happened is that the vast pools of American investments are spread out across a much broader array of investing and trading instruments. If you compare the Dj-30 or SP-500 to the COMPQX (Nasdaq) you will see that the COMPQX has had minimal decline in its volumes. Below is a chart image of the COMPQX:

Chart 2

Always rely upon empirical evidence such as stock charts to confirm what you read. There is no decline in the US stock market. It is busier than ever with far more opportunities for every market participant.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner
©2013 Decisions Unlimited, Inc.

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