One of the big knocks on this rally is that volume has been light. Tough to argue, because it has been. But what stands out about this argument is that it's one we've heard from the bears since mid-2009. I remember doing various bull/bear debates back then, and the bounce on low volume was a common bullet point in the bears' pocket. Fast-forward three years, and I'm hearing this exact same argument as a reason to be cautious.
My thinking has long been that volume in stocks is much lighter now than in the past because no one wants to own them anymore. We've lost a generation of traders over the years, so of course volume is lower. Also, there aren't nearly as many hedge funds as there were just a few years ago, so again, less volume just makes sense. Then, considering some of the issues we've seen from the high-frequency trading (HFT) crowd -- think Knight Capital Group Inc. (NYSE:KCG) here -- and again, less volume is totally logical.
Lastly, to compare volume during the financial crisis versus now just seems wrong. We had a generational low in stocks (remember, volume always surges at lows, not tops) with various banking stocks (trading under $5) accounting for much of the volume. I forget the exact number, but there was a time that Citigroup Inc. (NYSE:C) made up a very large portion of overall trading volume. To compare volume over the past few years with what we saw during the financial crisis is apples to oranges.
Then, I came across what Michael Santoli of Barron's noted regarding volume:
Yet in a report late last month, Brown Brothers Harriman strategists note that this is merely a partial give-back from the huge tripling of average volume from 2004 to 2009, as cheap high-speed trading and the financial crisis fed hyperactivity. More interestingly, they calculate that the unusual prevalence of very high-priced stocks today is helping to understate share volume. The number of stocks above $100 and the average price of shares in the S&P 500 are both near 22-year highs. Dollar volume, indeed, is up slightly from 2010.
This makes total sense. Whereas low-dollar bank stocks made up most of the volume, now the big, sexy names are the ones worth several hundred dollars. The Apple Inc.'s (NASDAQ:AAPL), Chipotle Mexican Grill, Inc.'s (NYSE:CMG), and Google Inc's (NASDAQ:GOOG) of the world are the ones traders play now. Of course, your average trader can't buy as much GOOG at $600, versus Bank of America Corp (NYSE:BAC) when it was $7. Then, let's forget the fact that the S&P 500 Index (SPX) has doubled over the past three years. So, it's safe to say most stocks have probably doubled as well. Again, how is lower volume a shock? It costs more to buy stocks, so people don't buy as many.
Mid-Caps Nearing a Triple of March 2009 Lows
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