Stock Market: Two Proven Indicators Confirm Trouble Ahead
Trading volume on the stock market is plunging. In classical technical analysis, rising stock prices on low trading volume are usually a warning sign of lower prices for stocks ahead. Why? Lower volume suggests there is not much investor participation in the stock market advance.
The chart below shows the change in volume on the Dow Jones Industrial Average year-over-year since 2009. In 2014, the index had the lowest volume in a decade. In fact, it was the lowest trading volume for the Dow Jones since 2004. The following chart shows five years of consecutive trading volume contraction. The last time we had five years of declining volume was the early 1970s.
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Dow Jones Industrial Average, Trading
Volume and Annual Gain:
| Year | Volume | % Change in Volume | Gain for the Year |
| 2009 | 316,916,755,456.00 | 34.23% | 18.88% |
| 2010 | 212,687,164,416.00 | -32.89% | 10.99% |
| 2011 | 209,494,276,096.00 | -1.50% | 5.53% |
| 2012 | 168,339,758,080.00 | -19.64% | 7.22% |
| 2013 | 129,748,958,208.00 | -22.92% | 26.50% |
| 2014 | 87,390,052,864.00 | -32.65% | 7.55% |
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(Source: Stockcharts.com, “Past Data,” last accessed April 27, 2015.)
Margin Debt Soaring
The next big warning sign for stocks: Investors are so optimistic about the stock market that they are borrowing money to buy stocks at a record pace. The amount investors have borrowed to buy stocks is reaching the highest levels ever recorded. In March of this year, it stood close to $500 billion.
(Source: New York Stock Exchange Data, last accessed April 27, 2015.)
With this kind of behavior on the stock market, you have to be very careful; high levels of margin debt can make sell-offs more dramatic. As losses increase, investors who have borrowed to buy stock face margin calls and liquidation.
Back in 2007, margin debt was hovering at historically high levels. A few months after, we saw a top set in for stocks, then we experienced one of the worst market crashes ever recorded. I doubt this time will be any different.
Optimism Is Way Too Extreme
Have stock market analysts and investors completely disregarded traditional equity valuation tools and basic economics? Each day, I hear someone saying how key stock indices will continue to go higher. Just recently, I heard Jeremy Siegel say the Dow Jones Industrial Average will be at 20,000 by the end of this year!
I don’t want to single out Jeremy Siegel; the optimism across the board is similar. Analysts are expecting the stock market to go up, but earnings and revenue are both contracting at this point, as evidenced by the first-quarter earnings report of the S&P 500 companies.
When the Majority Is on One Side, Be Afraid
I have said it before, and will I say it again; what we see now with historically high stock market valuations will not end well. Equities are setting up to disappoint investors big-time. Bull markets do not rise on falling trading volume, they don’t continue to rise when margin debt is at record highs, and they certainly don’t rise on earnings and revenue contraction.
