The stock market has been able to reverse losses in August and hold its own in recent weeks. But, you wonder if this reflects a renewed faith in the market or just a market gyration.
To answer that question, let’s look at a few statistics.
An astounding 56 percent of stock-market trading is done by high-frequency traders who only hold stocks for a few seconds, or even less, trying to make money off movements in stocks rather than the fundamentals in stocks. About 15 percent of trading is done by hedge funds, which are often quick to trade in and out of stocks.
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The long-term money, as represented by individuals, is only 11 percent of trading volume, and the long-term money, as represented by mutual funds and pension funds, is 17 percent of trading. So, only about one-third of trading is true long-term money and even half of that, the institutional money managers, can move in and out of the market pretty quickly. It doesn’t make you feel too comfortable that so much of the market is being ruled by short-term traders.
Plus, people are trading a lot less — almost one-third less than last year. Volume in August and so far in September is down almost one-third from August and September of last year. That doesn’t show a lot of conviction.
And it’s no surprise that stock-market mutual funds have shown net withdrawals every week since the "flash crash" of May.
Part of the lack of interest by individuals is just the demographics of people who own stocks. I see it all the time — people who are nearing retirement and have built up a good amount of savings. They are nearing the end of their income-earning years and are increasingly interested in protecting their money instead of risking it to make more money.
The thrill of the upside is not worth the pain of the downside because they don’t have the ability to earn back those losses. Of course, no surprise, this group of near-retiree high earners/high savers also own a lot of the stock that is held by individuals in our country.
Even more telling is the high correlation of stocks since the time of the flash crash. A good example — there have only been 20 days in the history of the stock market where 95 percent of the volume was to the upside. Interestingly, four of those days have happened since April and the market was actually lower a week later each time.
A “follow the crowd” mentality has set in. Again, no surprise, when over 56 percent of the trading is done by high-frequency traders who often hold stocks for only a few seconds.
All this tells you why the market has shown difficulty in reaching back to the highs before the flash crash of May. The economic news was grim all summer. It really hasn’t gotten much better in the first two weeks of September, although some analysts say it has.
Will a change in the government this election overcome these problems and push the market up?
Quite possibly, but most analysts, including many Republicans, seem to think an election boost as more likely a short-term pop of two weeks to two months, rather than a long-term boost.
The lack of a strong economic rebound, which is what the market has been counting on since it began its historic bull market in spring of 2009, will continue to weigh on the market for the coming months. There is also a concern that if gridlock results from the election, that could be a negative on the market during the spring as well.
Overall, it just seems that there aren’t many people who really believe in this market. Unless we have some really good economic news, that probably won’t change.
And because of this lack of faith, it remains very vulnerable to an economic shock. That could be anything from another European debt crisis to a big slowdown in China’s bubble economy to a host of other issues that could go badly for the market.
It’s an interesting time to be watching the market, that’s for sure.
About the Author: Robert Wiedemer
Robert Wiedemer is president of the Foresight Group, a macroeconomic forecasting firm that customizes its forecasts for specific businesses and investment funds. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here
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