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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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S&P 500 Volumes: Is This Downdraft for Real?

Updated: Nov 2, 2020

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I am looking at volumes this morning on the S&P 500 as the market appears wobbly all of a sudden, with the word “overvalued” being shouted increasingly from large hedge funds (the “rich guys” according to #POTUS) and institutional investors alike. There are all sorts of theories as to why the equity market has run up whilst the news on the real economy (according to data) has worsened. Exactly how to re-open countries and states whilst CV19 remains on the prowl is unclear and untested, as governments around the world are in the early stages of trying to delicately balance the trade-offs. There is still no readily-proven antibody or other treatment for CV19, and a vaccine unfortunately does not exist yet. In spite of this, investors are apparently ”looking past 2020” and valuing stocks on a strong post-CV19 recovery from 2021+. It makes sense in theory I suppose, but there are so many unknowns that I find it impossible to predict and model, and inherently too risky to bet on.

Let’s get back to volumes. I will summarise these YtD in a table, present a graph, and then conclude. The table below shows average daily S&P 500 volumes, the change month-over-month, and the change in the S&P 500 index month-over-month.

Volumes were around 3.7 billion shares/day in January, only modestly higher than average daily volumes in 2H2019 of 3.5 billion shares/day. February, and particularly in the second half of the month, is when daily volumes began to accelerate as investors ran for cover. March volumes were more than double the “normal” pre-sell off levels as the market really unravelled. Rather remarkably, when it started back up, the table shows that there is some truth to the fact that volumes were lighter (although not “normal”), which could have – at least in theory I suppose - exaggerated the recovery. In other words, lower volumes were associated with a nice recovery in April, whereas much higher volumes were associated with the downdraft experienced in late February and March.

The graph below illustrates volumes for the S&P 500, and includes i) daily volumes and ii) the 7-day moving average to better illustrate the trend.

Are we at a new inflection point, as we saw around April 7-9 (interestingly leading up to the Fed’s “buy everything” expansion of QE on April 9th) or in late April? In both cases, higher volumes were associated with solid moves up in the equity markets as “buying the dip” re-established momentum albeit on lower volumes. Or, are we now at a point when volume is starting to overwhelm the “buy the dip” investors as the index gaps down again? What is certainly true is that volumes are accelerating so there is growing conviction, and my fear is that it is not positive conviction because reality is setting in. As usual, time will tell.

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