Towards the end of August, Evan Lucas, a market strategist at IG Markets, warned there is a real possibility of a correction. Muted volumes during the month of August may reflect investors’ fear this could be an imminent reality.
A better than expected reporting season wasn’t enough to haul volume traded on the ASX 200 in August above the three-month average, confirming just how indecisive investors are. In fact, August volumes were the lowest since 2006.
The only other months this year with lower volumes were January and July – both months preceding reporting season, which are consistently lower average volume months.
Reporting season helped add 1.45 per cent to the index value. The expectations prior to earnings season was for corporate earnings to be downgraded, which didn’t eventuate for most companies. But it wasn’t enough to push the market, or volumes, higher.
Volume came in 11 per cent lower than the same period last year, when the market was gathering steam in the longest rally since the global financial crisis. As Adam Carr wrote this morning, the RBA’s comments and action on the monetary policy front have people thinking things are perhaps worse than they actually are. Consequently, investor interest in equities is being strangled.
This wasn't even be relieved by an election announcement at the start of the month and the likelihood we would be facing a change of government.
On Wall Street, the S&P 500 also saw lower average volumes for the month, down six per cent from August a year ago and, with the lure of summer vacation, the lowest monthly volumes for the year.
August volumes hint at the apathy investors are feeling at present.
The trigger for any correction could come if the next Federal Open Market Committee meeting diverges from expectations. At the moment, strategists expect the meeting will be used to announce the tapering timeline, with actual tapering to start in October.
Should the reality of the tapering timeline differ significantly from to the consensus, this will be enough to spark a correction. We could see markets temporarily spiral out of control, creating buying opportunities along the way for the brave.
A five per cent correction would push the ASX 200 below 4,900 points, showing yet again the market is struggling to hold above 5,000. With the current consumer crisis, getting back to 6,000 seems highly unlikely, within the next year at least.