Why light trading this summer is not so worrisome
Monday, August 27, 2012
NEW YORK (AP) — Someone call a doctor. The stock market just lost its pulse.
Prices are barely moving day to day. Investors are trading far fewer shares than they did last summer. And the future looks equally comatose. The Vix, a sort of crystal ball of stock volatility, recently hit a five-year low.
"August is usually slow, but this is terrible," says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. "Nothing is happening."
On Wall Street, dull is bad. The Standard & Poor's 500 index has risen 12 percent this year. But the slow trading is widely seen as evidence that investors lack conviction, a warning sign that the rally could peter out or collapse.
The summer of 2012 may indeed prove the calm before the storm. But there are reasons to be skeptical, and enjoy the break:
OUR MEMORIES ARE PLAYING TRICKS
The market feels dead because last summer was wild ride. Congress squabbled over whether to raise the debt ceiling, the U.S. was stripped of its AAA credit rating, and people feared another recession.
Stocks in the S&P 500 climbed and fell every day by an average 1.42 percent, according to Silverblatt. That included four straight days on which the Dow Jones industrial average fell 634 points, rose 429, plunged 519 and shot up 423.
This summer, stocks in the S&P 500 have moved up or down each day by an average of 0.67 percent. Historically, that's just about right. The average daily stock move since 1928 is 0.75 percent.
COMPUTERS ARE DISTORTING THE NUMBERS
Trading volume, the number of shares bought and sold each day, is down by a fifth from last year — more evidence that relatively few investors are pushing up stocks as Main Street folks abandon the market.
But Matthew Rubin, director of investment strategy at Neuberger Berman, a financial management company, says ordinary investors may have little to do with the recent fall in volume.
He says high-frequency traders, who use computers to profit from split-second gaps in prices as stocks gyrate, have been trading less because prices aren't jumping around as much.
Though they're relative newcomers to stock trading, HFTs are behind seven of every 10 trades, so a small pullback can have a big impact on volume. "A drop in volume shouldn't make you as nervous as one did 10 years ago," Rubin says.
RELAX, IT'S THE SUMMER
The fall in the Vix, popularly known as the fear index, could mean investors are complacent. If you believe trading lore, stocks could soon fall. As the Wall Street saying goes, "When the Vix is low, it's time to go" — as in sell.
But the Vix tends to drop most summers as hedge fund traders and professional money managers retreat to their second homes in the Hamptons. The exception was last year.
The Vix hit a high of 48 in August 2011, nearly double the highs in July and June, according to FactSet, a financial data provider. That high was also 2.5 times the high this month.
There's still plenty to worry about. After the stock market had one of its quietest days of the year Monday, David Rosenberg, chief economist at money manager Gluskin Sheff, sent a report to investors noting companies are barely growing earnings and too few stocks are rising above their 200-day average price, a sign the rally may not have enough breadth to sustain itself.
"This has been one of the more boring months," says Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati. "We made the remark that we should all take next August off."
But while boring is best avoided on dates and in novels, it may not be so bad in investing.
Consider the Vix, which earlier this month hit 13.45, the lowest since June 2007, six months before the Great Recession began. Waiting to buy until the Vix shoots up has a certain logic. The idea is that in worrisome times, when the Vix peaks, most everyone who wants to sell has already done it, so stocks can only go higher.
This has worked out wonderfully in some years, like 1999. The Vix that year was high, rarely breaking below its long-term average of 20. Better yet, its dips and rises that year tended to anticipate those of stocks, meaning you could have made money if you invested when the fear index was at its peaks. The S&P 500 rose 21 percent that year.
But as Ken Fisher points out in "Debunkery," his book on market myths, stocks have done well even when the Vix has been low and flat. In 1995, the Vix rarely rose above 15, and barely moved. Stocks rose 38 percent.
As for volume, the conventional wisdom is that high is good. But trading usually picks up in September, and stocks tend not to do well that month.
In fact, September is the only month in which S&P 500 stocks have dropped on average — by 0.7 percent a year since 1928. The average for the other months of the year? An increase of 1.1 percent.
What's more, if trading volumes are telling us something, scholars who have written dozens of reports on the subject can't seem to agree what that is.
Mark Hulbert, editor of Hulbert Financial Digest, says some say low volume leads to lower prices, as many on Wall Street will have you believe, while others have shown the opposite.
Hulbert's advice is to stop worrying about a dull stock market and enjoy the slow rise in prices while it lasts.
"It's dull in the sense there aren't a lot of fireworks," he says. "But then you're addicted to the excitement, and not in it for making money."
AP Business Writer Christina Rexrode contributed to this report.
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