By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Low stock trading volume and
volatility are messing with investors' heads, fogging their view of
the stock market. One analyst thinks these doldrums could turn out
to be the new norm.
Once again, the Dow Jones Industrial Average (DJI) and the
S&P 500 Index (SPX) finished the week at record closing highs
and the Russell 2000 Index (RUT) finally broke back into a gain on
the year.
Stocks rose in lock step Friday following a jobs report that was
in-line with expectations and unlikely to change any tapering plans
at the Federal Reserve.
But it all happened on the ninth-lowest volume day of the year.
The CBOE Volatility Index (VIX) fell 8% to 10.73 on Friday, its
lowest close since Feb. 23, 2007. Low volume and low volatility,
coupled with record-high stock prices, have some investors nervous
and thinking it might be 2007 again. That is, the rally before the
plunge.
"Things are dull, and that's a bad thing for financial
professionals who are always looking for the next big thing," said
Nicholas Colas, chief market strategist at ConvergEx, in a recent
note. "Volatility is the most powerful sensory input for investors
and brokers alike."
In the past week, daily trading volume has run below average
compared to the average volume over the past four quarters,
according to Barclays data.
Low stock volatility and thin trading volume are having a
strange effect on investors. It's a lot like when someone is placed
in an isolation tank, said Colas.
Read: What's lurking under the low VIX?
Are the markets in 'Altered States'?
With a lack of input, a mind in a sensory deprivation chamber
seeks to make up its own input to compensate for the deficiency,
resulting in hallucinations. Low volatility and volume are having a
similar effect on the market, Colas reasons, resulting in
"hallucinations" of both the bullish and bearish varieties.
For bears, the hallucination is that record high stock prices
are solely the result of Federal Reserve easing, and that
everything will fall apart when easing is gone, Colas said. For
bulls, the hallucination is that economic growth with very little
inflation is nearly guaranteed for the second half of the year.
While there may be a bit of truth in both, the "hallucination"
is the part where the lack of market activity and movement is
pushing investors to fill in the blanks.
What's closer to the truth, Colas said, is that investors got so
used to the levels of volatility and volume from the crisis years
that current levels seem unnaturally low by comparison. What's
certain is that markets are structured differently than in 2007, so
perhaps current volume and volatility has become the norm for the
new structure, he said.
"The appetite to move around has diminished," Colas said in an
interview. "People are more confident in their positions."
Colas said he's looking at oil as a possible source of action.
Typical shocks in the market are often accompanied by spikes in oil
prices. Crude for July delivery (CLN4) settled slightly lower on
the week and prices are generally considered to be in a "sweet
spot" heading into this week's OPEC meeting.
Surprise pullback likely
The longer the stock market remains quiet, however, the more
likely a correction will blindside investors.
Take these statistics from the WSJ's data group:
A Dow bull market on average experiences a correction roughly
every 12 months, their analysts note. The Dow is now up
approximately 59% from its last correction low on October 3, 2011
and is on its 32nd month without a 10% pullback.
Most investors are extremely and complacently bullish and are
ignoring weaker seasonal historical trends that occur around this
time, said Brian Belski, chief investment strategist at BMO Capital
Markets.
Near-term, while many acknowledge that a pullback is coming,
there's too much complacency and that makes a surprise pullback
very likely, according to Belski. Stocks have already spent half
the year clawing their way back to low-to-mid single digit gains
for the year after an initial drop that followed 2013's 30%
gain.
"I would be super careful as an investor being uber,
uber-bullish right now after the huge move," he said.
Still, at its healthiest, a bull can run for quite a long time
without a pause. The longest period without at least a 10% pullback
was during the 1990-1997 run, at 82 months, according to the WSJ's
data group.
All quiet on the earnings, data front
The quiet isn't just restricted to markets. This week is pretty
thin on economic data and earnings.
May retail sales data is scheduled for release Thursday, with
the University of Michigan consumer sentiment number for June to be
released Friday.
One spot of interest is Apple Inc. (AAPL) On Monday, it will
start trading as a sub-$100 stock, after a 7-for-1 stock split goes
into effect.
Only one S&P 500 company reports earnings this week: H&R
Block Inc. (HRB) on Wednesday.
Other companies of note reporting earnings include RadioShack
Corp. (RSH) on Tuesday, Restoration Hardware Holding Inc. (RH) on
Wednesday, and Lululemon Athletica Inc. (LULU) on Thursday.
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