Three trillion dollars.
It’s not chump change, and it’s the most recent figure I’ve seen of investor cash sitting in money-market mutual funds (Investment Company Institute estimate). Cash that could be in stocks.
I know I’m not the first to point it out, but last Friday’s first year-to-date (YTD) closing high above the psychologically important 1,900 mark on the S&P 500 coincided with some of the lowest volume trading over the same time-frame.
The low volume is just another reminder of the increasingly tenuous state of equity valuations over the past five years, as fundamentals struggle to improve, as non-institutional money remains on the sidelines, and as markets are increasingly driven by institutional trading (along with the increasing influence of computer-driven trading in that neck of the woods).
Daily trading volume on U.S. markets declined from close to 10 billion shares back in 2009, to levels in the low 6 billion-share range as of 2013 year-end data.
This lull in presumably institutional volume can serve as a call to action for individual investors with investment time horizons greater than a couple of weeks, and better for those with more than a couple of months before they need to liquidate for whatever financial-planning reason. Timing could be tricky over the next year or so, for sure, but over the next several weeks the low-volume trends we’ve seen recently could work in our favor as longer-term stock pickers.
|Low volume is another reminder of the increasingly tenuous state of equity valuations over the past five years.|
Now it’s true we saw a boost in volume at the beginning of 2014, but most of this trading appeared to me as just larger-scale investors settling positions that performed better than expected during the rising-tide market of late 2013 (where all “boats” were lifted more by pure momentum than by incrementally better earnings news).
That early 2014 bump in volume initially seemed to merely mirror investor interest in potential winners and losers based on first-quarter earnings reports. But since the first month or two of 2014, market action has been increasingly driven by institutional traders, and it seems the individual has re-withdrawn from the trading floor.
More important for me and my Weiss Research service, though: At the same time prices were being bid up by institutional investors in the spring of this year, the Weiss Ratings set was starting to waver in its overall bullishness. This served as a strong signal to me that a potentially dangerous situation could be developing – where investors’ reads on stock prices get too far away from fundamentals underlying those valuations.
[Editor’s note: Don has used the Weiss Ratings as one of his tools to help make Martin $311,671.64 richer! And he reveals how you can follow his every move right here.]
As we traveled through that time period, and as I noted the simultaneous, general deterioration in the overall Weiss Ratings set, I shifted my tactics toward raising cash and waiting for the inevitable flush-out of individual investors. I saw many individual stocks with continued resilience in industries and sectors in the pro-cyclical category in terms of the Weiss Ratings (like financials and energy) turn into sentiment-driven trading ideas over that period as well, though.
Although my main investment goal is long-term gains greater than the general market, I need to also consider the short-term issues likely to create both opportunities and challenges for my subscribers. The short-term investor seems less represented by the individual investor right now than ever before. And I think the apparent disengagement by the small investor could set the stage right now to gain even more exposure to equities, if only in a Ratings-driven way.
I’ve seen a lot of the more individual investor-centric sectors and industries – like tech in general this year, and the retail industry in the consumer discretionary sector– fall by the wayside lately, just as the more defensive areas of the market maintain their value.
This robotic-style investment backdrop is indicative of the “machines” running the show, whereas more subjective opinions fall to obscurity.
This is just the time, in my view, where we should be adding exposure to the cyclical sectors and to those other little pockets of the market where individual investor interest is likely to return. Beneath all of this vetting of macro-driven consumer sentiment, I always think it’s best for serious investors to use anomalous weakness (that type of weakness driven by emotions rather than fundamentals) to add to those stocks where profit conditions are obviously improving but where stock prices are at a discount, or to those where fundamentals are not yet recognized as sustainable.
The Weiss Ratings are still pointing toward a pro-cyclical sector positioning right now, in my analysis. And the market looks ripe for a high-volume, negative reaction to the low-volume move to new highs. I expect this to be a relatively quiet summer trading season, so there should be ample time to vet carefully which stocks have the best shot at both near- and longer-term returns.
It’s also a time to monitor volume levels for confirmation. If we continue to see weak volumes over the entire summer, it may be a sign of further disengagement come the second half of 2014. This could change the way I position for the near-term at that point. But I’ll be more focused on the state of the Weiss Ratings set in relation to both the fundamentals and the price action at that point.
For now, I’d say monitor this holiday-shortened week’s trading volume closely. I expect it to remain very low, and for a slow summer to develop.