Collapse in Trading Volume Makes Stock Price Rise Suspicious

Crashing Stock MarketOne of the fundamentals of economics is that rising demand for an item pushes prices higher, while declining demand results in lower prices. It’s common sense: the more people want something, the higher the price; the less people want something, the lower the price.

That is what has me very suspicious about the stock market. Since 2009, stock trading volume has all but dried up, yet stock prices have gone up instead of down on the softer demand for equities.

The chart below shows the trading volume on the Dow Jones Industrial Average since 2009.

Trading Volume, Dow Jones Industrial Average

Year Volume Change YOY
2009 316.91 billion 34.23%
2010 212.68 billion -32.89%
2011 209.49 billion -1.50%
2012 168.33 billion -19.64%
2013 129.74 billion -22.92%
2014 87.39 billion -32.65%

Data source: www.StockCharts.com, last accessed January 5, 2015.

In 2014, volume on the Dow Jones Industrial Average declined to 87.39 billion—the lowest trading volume year since 2004! Trading volume is down 72% since 2009!

Too Late for Investors to Avoid Stock Market Risk?

Here’s more proof investors are quietly moving away from the stock market.

“The risks of owning stocks at this point in the rebound from the 2009 stock market lows are very high.”

According to the Investment Company Institute, in the first 11 months of 2014, U.S. long-term stock mutual funds witnessed an outflow of $39.4 billion. In all of 2013, these funds had inflows of $18.5 billion. Also, while the monthly figures for the last month of 2014 are not yet available, looking at the weekly data, investors sold U.S. stock mutual funds again—about $13.0 billion worth. (Source: Investment Company Institute web site, last accessed January 5, 2015.)

And the return on stocks has been declining. After a stellar 2013, the Dow Jones Industrial Average rose only 7.5% in 2014. The Russell 2000 Small Cap Index rose only 3.8% in 2014—its slowest annual rise since 2011. (Source: www.StockCharts.com, last accessed January 5, 2015.)

Dear reader, the risks associated with owning stocks (that I talked a lot about in these pages in 2014) are starting to become a mainstream concern. Uncertainty is increasing. The risks of owning stocks at this point in the rebound from the 2009 stock market lows are very high.