MARKETS SPECTATOR: Show me the volume

Brokers are already starting to sniff the change in the air. The big pile of money that left equities in the past year or two is on the cusp of returning.

It’s back baby. Well, at least in glimpses. Value surged, relative to the last month, on Wednesday and Thursday this week as signs of real buying emerged.

One of the big brokers in town commented "value today was very good (relative to the last month) at $4.7 billion. This is significant in that the rally before was supported by light value, but this large value gives this rally a backbone and I’m not scared to say it’s going a lot, lot higher in the next 2½ months.”

You don’t have to speak to too many brokers before the conversation quickly turns to ‘how bad the volumes’ are. It’s a very hot topic at the moment as the industry continues to see consolidation and as hundreds of ‘once the envy of the everyday worker’ stockbrokers throw in the towel citing ‘it’s all too hard’ or ‘it’s different this time, this market is never going up’.

Funnily enough, the contrarian in me sees this as a good sign, mind you as it just shows how bad sentiment is. As the saying goes, you can’t fall off the floor and things can only improve!

There’s no doubt some structural changes going on like the regulatory change against broker principal trading as well as the continued shift from full service brokers to the online, do it yourself model. But that’s been happening for years.

One of the bigger reasons is the complete loss of faith in the stock market given the tumultuous events of the last five years. In this post-GFC world – where those who didn’t get ‘burned alive’ are few and far between – ‘confidence’ in the market is something very hard to find, especially among the retail/mums and dads sector.

Historically, retail investors have made up a large percentage of volumes so it’s not surprising to be seeing low volumes given the little participation from this sector of the market. In fact, retail investors are running their lowest equity weightings in 20 years.

Quite simply, it’s been much easier for mums and dads to sleep at night with their hard earned savings sitting in a high interest account rather than riding the thrills and spills of global markets.

However, with interest rates heading south this reasoning is already starting to be tested (check out the returns on high dividend paying stocks over the past three to six months) and will continue to do so as more and more investors realise they need more than a 3 per cent return on their money to live, especially the self-funded retirees.

Another reason to consider regarding volumes is the complete lack of selling. Retail investors are not sellers; they sold near the bottom two years ago as volatility was too hard to bear. The sellers simply look exhausted, or very close to exhausted. Of course there will be the usual bouts of short term profit taking but any participants with large positions who wanted to exit equities did so 12-24 months ago.

Basically, there’s a huge pile of money that will be looking to get back into equities over the next 12-18 months versus a very small pile of money that wants to get out; it’s a simple supply/demand game.

The volumes will start to return with time, although not to their previous levels due to the structural changes now in place. We’re in the first stages of a bull market, the stage where stocks climb the wall of worry and the market ‘grows on scepticism’. As stocks continue to push higher, more people become believers – buy on the ‘fear of missing out’. As participation picks up, so too will the volumes.

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