VOLUME AND VOLATILITY

Markets are an ongoing learning curve.

There are things like two Ps, one S and two Vs.

The Ps are about premium and price. The S about spread and there nearly always is one. So pay attention. Tons of money get made daily on the spread. Think wages and productivity here just for one.

Lately, there's been an absence of the two Vs, volatility and volume.

According to the Wall Street Journal, this slowdown might be soothing the nerves of some, but what does it mean for others in particular and the market in general?

Volatility and trading volumes have collapsed this month as U.S. stocks have marched to fresh records, a respite that few investors foresaw and few expect to continue.

For now, the return to placid markets is being welcomed by buy-and-hold investors who have been rewarded in recent years for sitting tight. The Dow Jones Industrial Average notched its first record close of 2015 on Friday, while the S&P 500 posted its third record finish and the Nasdaq Composite is less than 2% from its first record in almost 15 years. 

Yet the February trading environment threatens to deal a new setback for banks and hedge funds that make more money in bumpy markets. Many bankers and short-term traders welcomed a raucous January in which stocks slipped in heavy trading as price swings widened.

Last year, stock-trading volumes increased for the first time since the financial crisis, and the pickup carried over into January. But in February, daily average trading volume slumped 4.8% from the prior month. Two of the three slowest trading days of 2015 came last week.



Like it or not, the big banks have been over-regulated, as is the wont of politicians and bureaucrats and the reactionary world they inhabit, and their trading desks have taken the hit. Volatility and volume are usually event driven.

The list of gray to really dark clouds hovering over global markets seems calm for now, but this could be the big lull before the even bigger storm.

By some accounts, high frequency trading--much in the news last April owing to Michael Lewis' book about it, "accounted for 46% of stock-market trades in January, up roughly two percentage points from last year's average and up about three percentage points from 2013."

In the past low volatility and volume has pushed the market higher on several occasions, but that begs the question about just how stretched valuations are now in this market and, oh yea, some of those gray and dark clouds still hovering out there.