by Jason Bodner
January 10, 2023
With a New Year upon us, I’m going to give you a useful tip: Hydrate. A new study from the National Institutes of Health looked at data of 11,000 people for more than 30 years. The study found that those who drank more water had fewer chronic diseases and lived longer. I suppose it shouldn’t be surprising – but ask yourself: Do you really drink enough water? I bet the answer is “no” for most of us.
Hang on, I need to grab a glass of water….
Here’s another useful tip: Stop looking at the market’s daily gyrations. I’ll bet a similar study to the 30-year water study would show that those who don’t watch the market each hour also live longer.
So far this year (and the back half of December) would be enough to give anyone heartburn. Many questions loom over our collective global heads: When will the Ukrainian war end? Is America in a recession or not? Will rates stop rising? Will this be a miserable year? Many investors seem to seek answers to these long-term by looking at the tape all day. And so far, through Thursday, this year has been volatile and ugly. As of this writing, the SPY (S&P 500 tracking ETF) is flat on the year.
(P.S. Friday was strong, which goes to show you the pointlessness of watching any short-term trend.)
Let’s dig a little under the hood and see what’s really going on. First, we will look at the anemic volumes.
Here’s a table of daily volumes of the SPY. Yahoo Finance uses a three-month average volume as their benchmark. For the SPY that’s nearly 87 million shares a day. What’s plain to see is that since December 15th (after Fed Chair Powell spoke on the 14th) there have been only two of 14 trading days where volume exceeded average. Unfortunately, both those days were down days, as the market didn’t like what Powell had to say. But you can clearly see, that volume is below average, in some cases significantly below:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Next up, I will show you a chart of unusual trading. MAPsignals looks at volumes that are out of the ordinary. The following chart displays all unusually large trades in the aggregate for any given day as an amber bar. We can see that it tells the same story: No big volumes to speak of, aside from the 16th of December, which was post Powell and a huge options expiry which normally sees volume spikes.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Finally, to reinforce the weak volume observations: here’s a snapshot of the unusual buying and selling by market cap. Ordinarily to start the year, trading is usually high volume as managers reposition for the coming year. This year, not so much. This chart shows 284 total signals through four trading days. The daily average of signals since 2005 is roughly 100. So, this chart indicates unusual buying and selling volume is 75% of the 17-year average. Again- we should expect more volume to start January – not less.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Finally, we can see the volumes as anemic in both the stock and ETF buys and sells. Look how since mid-December volumes have dwindled:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This low volume paves the way for volatility and big bid-offer spreads on stocks and especially ETFs.
Who could possibly be happy about that? I mean who can make money in that environment?
The answer is clear:
This is Who Profits from Low Volume and Wide Bid/Offer Spreads
Citadel can serve as a proxy for all hedge funds and prop-shops engaged in algorithmic trading. There are hundreds collectively managing $100s of billions of dollars. Algos trade like crazy when volumes are thin because they specifically profit off capturing the bid offer spread – the distance between where you can buy a security or sell it. They specialize in market making and win this game by knowing what you – the retail investor – are going to do before you do it!
Those apps and brokerages that offer no commission trading are great, right? You get to trade for free all day long! But there’s no free lunch. There’s always a fee to be paid. In the case of “commission-free” trading, you pay with the information that your order flow gives the trader.
People like the aforementioned giant hedge fund(s) buy the order flow information. They can see when there is stock to buy or sell. They can then – within nanoseconds – rush in front of your order, buy the stock, and sell it back to you slightly higher. They can do this with no human interaction, fully legally, and do so all day long. They act so fast that one second is like a full trading day to these algos.
The point here is that not all investors are unhappy with markets like these.
The bottom line is that everyday investors – normal investors – don’t enjoy choppy markets. They wonder how low we will go on with such chaos. They wonder if they should stay in. It causes stress and anxiety. But this state of affairs will not clear up until there is a little more clarity on the war against inflation, interest rate parity, and whether or not any recession would be short lived or not.
Friday’s price action was very strong on economic data that came out, such as Friday’s non-farm payrolls number, which came in hotter than expected, adding 223,000 jobs vs. +202,000 expected. Unemployment was also better than expected at 3.5% vs. 3.7% expected. But the market really began to rally on wage data: Average hourly earnings, month-over-month was +0.3% vs. +0.4% – lower than expected, while year-over-year was +4.6% vs. +5.0% – also lower than expected.
This data should ease some of the Fed’s concerns on the tight labor market.
Again – we live in bizarro world. Any data showing economic slowing as a result of a successful war against inflation is good for stocks. Hence the sizeable rally (as I write this.)
The key here is that when volumes are thin, it’s a “cat’s away, mice will play” situation. High-frequency traders and algo will continue to mint money in conditions optimal for them to do so. Those conditions are usually the ones that give “normal” investors heartburn. If this relief rally holds and there is some good volume behind it, that can be constructive for a near-term rally in stocks.
That might make us all feel better and give some needed relief.
As Lily Tomlin said, “For fast-acting relief try slowing down.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Which Stocks Will Win (or Lose) This Earnings Season?
Income Mail by Bryan Perry
The Market Seems Ready to Pivot Higher on an Inflation Epiphany
Growth Mail by Gary Alexander
Which Will it Be – Another Roaring 20s, Or Stagflationary 70s?
Global Mail by Ivan Martchev
As January Goes, So Goes the Year (Sort of)
Sector Spotlight by Jason Bodner
Low-Volatility and Large Spreads: Who Could Like That?
View Full Archive
Read Past Issues Here
Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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