Why the Present Stock Market Correction Can be Catastrophic ?

22 December 2018

Nowadays,  many websites that predict stock market trend are pointing towards one direction i.e. the present stock market will go down and the correction will be quite serious.  However,    none has a good answer just how serious it will be and why it will be so?   This article intends to throw some lights to explain why.

How? 

Just by using trading volume in NYSE.

Why?

We all know that trading volume is important when we analyse the stock market.   If there is an up market,  there must be up trading volume to support it;  otherwise,  this market will not last very long.  Similarly,  if there is down market,  the down trading volume should also reflect the same.

What if not much up and down volumes?

This will mean there isn't much trading volume to support the market.  Market will soon “collapse”,  whether it is going up or going down.

How to get the information?

If one care to take a look at any historical data or chart of any stock exchange,  one should be able to see volume.   It is always plotted as a bar chart at the bottom as shown.  

This volume bar chart that shows the total trade volume will not tell how much of the volume was  buying up and how much was buying down the market.   

Fortunately,  freestockchart.com has already prepared such an up and down volumes and plotted them as  NYSE UP Volume Index and NYSE Down Volume Index.   For example,  the following chart is a "NYSE Up Volume Index" chart.   However,  this chart  is not very useful.

If we hide the daily data and use the chart's 20-day MA to plot from year 1966 to date,  one could immediate see a pattern began to form as shown attached

IT IS A SURPRISE TO SEE THE PRESENT RALLY AFTER 2010 IN NYSE HAS NO SUPPORTING UP TRADING VOLUME!!!

This is also true for the down trading volume

 

What Do All these Mean?

1.  The retail investors have not much  confident in the stock market after year 2010 and after the market picked up in March 2009; 

2.  One could see that the trading volume spiked up to 4,500 billions in the 20-day, indicating many had taken the opportunity to sell into the strength of the 2009 market before leaving the market;

3.  The market picked up most trading volume after 2002 when the trading volume increased to a level above the NYA index.  This is mainly because of the explosive use of the Internet facilities to increase the trading accounts.

Gallup,  the organisation that polls and provides statistical results has this following chart to show.  The chart shows the US Adult traders increased from 58% in around year 2000 to a peak of 65% in 2008.  Thereafter,  many left the market and the US Adult traders dropped to 52% in 2016.   This Gallup’s chart supports the reason why the market has diminishing volumes after 2008/2009.  

Why Market Still Keep Going Up?

Mr.  Ben Bernanke who had “engineered” the Quantitative Easing (QE) in 2008/09  must have the correct answer when he “flooded” the market with liquidity that was available only to the big players such as Banks,  Institutions and other big financial users.  These few players,  having “loaded” with excess liquidity,  was probably given the “permission” to  also “flood” the stock market.  One thing they could have done was to push up the stock prices without pushing up the trading volumes. 

What will happen next?

Your guess is probably better than mine.

What we should do next?

Watch carefully how Fed reacts in its “liquidity tightening” exercise and how Fed reduces its balance sheet.  As Fed reduces its balance sheet,  it will also “pull” money from the market and “destroy” them.  This will “clip the wings” of the Banks,  Institutions and other big financial users.  It would bring the stock market to its knee.

Therefore, it is always good to pay attention to the trading volume and analyse why there is an abnormal increase or reduction  in the trading volume.  Also,  one should pay good attention to track the margin loans that investors (including banks and institutions ?)  borrowed to prop up the market.     
Wolf Street has just reported that about $1.3 Trillion “Leverage Loans” increased since 2014 might just  come “Unglued”.

Disclaimer:  This article is for information and  educational purposes.   Readers are advised to  conduct their own research and study to make their  own investment decisions.

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