Equity prices have led economics and it is catch-up time, but what if the economy does not show up? Have the volume of shares bought in rising stocks proven to be the right backdrop for continued confidence in more equity gains? What risk premiums would you attach to this market? Cash, Gold and Crypto-Currencies have been winners this summer, but will that continue? Is it time to batten down the hatches as the horizon shows greater instability with each passing day?
The year 2017 has seen the DJIA rise by 2,200 points through August 31, 2017. An impressive positive performance. With this magnitude of a gain, over 11%, would you expect the volume of activity in 2017 to confirm the gain by also showing higher volumes and much greater positive volumes, indicating broad participation and engagement in the market? I would want to see that. If we look at the same period in 2016, the DJIA index rose by 1,067 points, roughly half of what we have gained in the YTD 2017 period. Now I really expect the 2017 data to be much better than 2016, given the greater Index gains.
What does the activity on the NYSE reveal?
Shares traded by month on the NYSE for 2016 and 2017 (in billions of shares):
It is surprising that in every month the volume of shares traded during 2017 are below the monthly shares traded in 2016.
What about the composition of the shares traded? I would expect that the net volume in stocks that advanced in price for 2017 would be much higher than the net volume in 2016. If this is the case it would make me less concerned about the overall volume decline that we see above. So what happened? In the YTD period through August 2017, advancing volume exceeded declining volume by 2.15 trillion shares. In the YTD period through August 2016, advancing volume exceeded declining volume by 7.5 trillion shares. WOW! There is a disconnect here that is astounding to me.
What happens if we move away from stub periods that are less than 12 months in length, and look at the comparisons between years using the fiscal years September through October, from 2011/12 through where we are in 2017, with one month left to go in the fiscal year. Will that help alleviate the concern that the one-off comparison above revealed? Let’s see.
It is clear from the above that the current activity in 2016/17 is an anomaly. The volume of net advancing shares per point change in the DJIA Index is significantly below the historic average, and indicates the weakness of money flows into advancing stocks overall during the current period. This is of great concern to me and casts significant doubt as to the equity market’s support for current prices.
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