Download Trading Volumes in Perspective

Investment Strategy Group
May 2012
Trading Volumes in Perspective
NYSE Euronext recently reported a 44% decline in quarterly earnings, due
largely to a 23% drop in the exchange operator’s trading volumes from a year
earlier. The development confirmed something already known to many in the
investment community—that equity trading volumes have been depressed, which
is traditionally a technical indicator of bearish sentiment. Curiously, this light
volume has come in the midst of a 29% advance by S&P 500 since its October
4, 2011 market low. In this edition of Strategic Spotlight, we discuss the reasons
for the meager volume and what it could mean for investors.
High Frequency Trading Distorts Numbers
The Investment Strategy
Group provides guidance on
asset allocation and portfolio
strategy in support of
Neuberger Berman’s clients
and investment professionals.
Matthew Rubin
Director of Investment
Strategy
Justin Gaines
Associate
Within the realm of technical analysis, increased equity trading volume is generally
considered to be a positive market indicator while depressed trading volume is thought
to be more pessimistic. Indeed, technicians believe that volumes—whether high or
low—validate the prevailing trends of the market and should expand as the market
continues in a particular direction. Yet, three years into the current bull market, trading
volumes continue to shrink. Does this indicate underlying vulnerability in stock prices?
Not in our opinion. What it does reflect is the weakening role of volumes as an
indicator of market direction—in part due to the proliferation of high-frequency
trading, which accounts for roughly half of all market activity. Although highfrequency trading would seem to imply increased volumes, such trading has actually
been slipping since last summer. Overall, S&P 500 volume has steadily declined since
March 2009 when the current bull market began.
NOT WHAT IT USED TO BE
Although equity market
volumes are not giving the
bullish indication some
investors would like to see, we
continue to maintain our
constructive longer-term view
on equities.
S&P 500 Volume (30-day average)
Billion shares
8
7
6
5
4
3
2
1
0
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Source: FactSet
Investors Remain Cautious
Another reason equity trading volumes have been low is because of the “wall of worry”
that has been prevalent throughout the three-year market advance. For those that
experienced two of the largest equity market declines in history in the past 10 years,
ongoing market volatility and an uncertain global macroeconomic backdrop have done
little to calm investment sentiment. Today, the European sovereign debt crisis looms
large and the possibility of a mid-year slowdown in domestic economic growth,
reminiscent of both 2010 and 2011, remains front-of-mind. As a result, many investors
have stayed on the sidelines despite double-digit gains this year for the S&P 500
(+11.8% as of April 30), limiting volume, while bond funds continue to garner the
majority of asset flows, even with interest rates near historical lows.
Takeaway: Focus on Fundamentals
Although equity market volumes are not giving the bullish indication some investors
would like to see, particularly at this later stage in the market recovery, we continue to
maintain our constructive longer-term view on equities. As has been the trend the past
few quarters, corporate earnings have once again surprised to the upside, which could
lead to increased investor confidence and more assets moving back into the market in
support of the rally. While we anticipate investors adding to their equity exposures as
they become more comfortable with the global environment and growth backdrop, we
remain focused on the fundamentals within corporations as well as the economy, both
of which in our view are currently providing encouraging signals regarding what’s to
come.
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