It's all because of the
, they say.
Volume stinks because the Fed is in the way.
There's a good deal of truth to the statement that the Federal Reserve is inhibiting the market right now. Daily stock market volume on the
New York Stock Exchange
Nasdaq Stock Market
has dropped to last October-December levels. Investors, anxiously awaiting a potential 50-basis-point hike from the Fed on May 16, are understandably cooling their heels.
But volume has been anemic for nearly three weeks -- both on the NYSE and Nasdaq. This, after strategists figured that the heavy volume and high volatility of February and March marked a new world order. While conventional wisdom holds that volume will pick up after the Fed meeting, it's not a given with this ever-fickle stock market, especially with the Nasdaq still down nearly 30% from its peak.
For investors, including individuals, who expected the Nasdaq to bounce back after hitting 3321.2 on April 14, the times have not been kind, and strategists believe the decline in activity marks a change in psychology. For starters, it could mean the acknowledgement of the ever-dreaded "b" word in the Nasdaq.
Nasdaq and Volume: Lousy Together
"One characteristic of bear markets is very light volume," says Richard Dickson, technical strategist at
Scott & Stringfellow
. "It's possible that that's what you're seeing in part and parcel to technology stocks, and to a degree that's carrying over to the Dow and NYSE."
Dip buying, which was the mantra of just about anybody in the market during the recent boom, has now only proven to dig one further into a hole. Sentiment is becoming increasingly bearish among Wall Street strategists, and the chance of a fund manager stepping out on a limb to make risky bets is slight -- the trend is no longer anybody's friend, and for that reason, the fact that stocks are still overvalued by most measures is more and more glaring.
"People wanted to do more with this thing at 5100," says one trader, who asked not to be identified. "People are saying, 'my stuff is really down 30% to 40%, and I dare not take a flyer on this.' "
The outcome of the Fed meeting won't change the current feeling about fundamentals. As is typical, the stock market is beginning to think that this hike, especially a 50-point one, will be the last one. That doesn't seem too likely, though.
And if it is the last hike, it still indicates that economic growth will slow, that inflation has already kicked up a bit, and the overall environment no longer rivals the steady, non-inflationary growth of the last few years. That's less supportive of stocks.
Gary Kaltbaum, technical strategist at
, says he doesn't expect volume to increase soon, but if it does, he's looking for a few strong rallies on high volume to indicate the next market trend. A few days like that, he said, would boost investor confidence and propel the market to the end of the year. If not, he said, investors are more likely to retreat into their shells.
Dow Poised for a Rebound?
Which is what individuals who invest in mutual funds have done. Flows to aggressive-growth funds that put the bulk of their cash in tech have dropped off in the last couple of months after surging quarter after quarter. Syl Marquardt, director of research at
John Hancock Funds
, says increasing fund flows make trading more frequently easy -- as it did all the way through March (when redemptions increased). A new dollar every day means something new to buy every day.
"The effect of cash flow into the funds is to greatly magnify trading volume, because it's being put to work," says Marquardt. When volume decreases, however, "sellers have to contend with less liquid markets."
Couple that with the huge volume of stocks available for purchase -- once last year's IPO lockups expire -- and that's a lot of supply to potentially depress prices on the Street. "You have to convince sellers to sell something to buy your shares," instead of simply buying more shares, says Marquardt. "I think it'll be tougher sledding."
For the average technical strategist, the patterns exhibited in the Dow Jones Industrial Average and
are supportive for a rebound. Volume has been declining as those averages came close to retesting recent lows, an indication that much of the selling had been flushed out. The pattern on the Nasdaq isn't quite as positive, says Richard McCabe, chief market analyst at
-- volume had been trending downward even as the Nasdaq rallied off of its lows, and it's rebounded on declines, indicating that more selling could be on the way.
The image it conjures up is of a groundhog perpetually scared by its shadow, retreating further and further back into a hole.