Stock Market Volume

Dropping Stock Market Volumes (Source: Bloomberg)

Dropping Volume
We can see from this chart from Bloomberg.com that stock market trading volumes are almost one half of what they were at the beginning of this rally.  Some would call what we are experiencing a new bull market.  Me, I remain unconvinced.  While the volumes have dropped off, many, if not most, have put much of their cash to work.  Fund managers are at record levels of  participation in the markets.  So, if so much cash is actually in the market, why are volumes so low?  While we can't tell for sure, it would seem people are prepared to stick with what they have, as long as the market continues to climb.

Volatility
The problem with everyone sitting on their hands is it increases volatility.  When there is no shortage of buyers and sellers it is easier to get our price.  Fewer participants translates into greater variation between what sellers want and what buyers are willing to pay.  Think of the real estate market.  In times when there are fewer sellers and we need to buy a house, we can end up paying a lot more than we might otherwise want to.

It also means it is easier for the big guys to defend their gains.  Market index values and portfolios can be maintained by purchasing fewer shares in favourite names than would otherwise be the case.  Still, market breadth as measured by the number of companies reaching new highs continues to be strong.  Weaker volumes do not signal an impeding implosion of the stock markets, but moves not accompanied by strong volumes tend to be shorter in duration.

All In (Or Out)
There is no level of volume at which one could predict a reversal in the stock market.  If that were the case we would likely be able to determine the peak or bottom.  The thing to remember, and what makes a reversal so hard to call, is they come when everyone is in, or out, who wants to be.  Either buying dries up at a top as new buyers refuse to pay higher prices, or sellers are exhausted at a bottom.

As for me, I have already taken my profits.  Are you all in, or all out?