07/27/16   Dog Days Underway

Editor’s Corner

Ron Rowland

Slowdowns in stock market volume are common in the summer months. For Europe, the slowdown is typically centered in August. For the U.S., this seasonal event does not always arrive in the same month every year, and sometimes it doesn’t happen at all. Vacations are certainly a contributing factor, and the weather and news cycle play a role. However, other factors always seem to be at play. For the U.S., this year’s summer volume decline is already well underway.

The average month has 21 trading days; therefore, a 21-day moving average provides a good way to filter out the daily noise and focus on rolling month-long data points. Looking at the total volume figures for the New York Stock Exchange, its 21-day moving average peaked at 1.22 billion shares in mid-February. It established an interim low of 907 million shares in mid-April, and then grew during the ensuing three months.

On July 12, another peak was established when the 21-day moving average registered 1.09 billion shares. This period encompassed three rather large daily volume spikes associated with the Brexit vote, options expiration, and the annual Russell 2000 Small Cap Index reconstitution. Since then, volume has been all downhill. Yesterday, the 21-day moving average fell to 917 million shares, and it is quickly heading toward a new low for the year. If it doesn’t happen today, then it will probably occur by Monday after the last of the June volume spikes comes out of the moving average.

Chances of a volume pickup in August are possible, but not probable. However, it’s not the kind of event one should wager on. You do not need to look any further than a year ago to find an example of August volume being higher than the seven preceding months. Volume is important for a number of reasons. One reason is that it provides an indication of supply and demand. Another is that it helps gauge the strength and validity behind any given move. Market technicians tend to distrust any low-volume move.

Although volume typically declines at some point during the summer months, the magnitude is usually not a concern. Unlike the half day of trading following Thanksgiving, when volume falls so low that it becomes easy for traders to push prices around, the slowdown during the dog days of summer is generally a nonevent. Even so, in late August you will hear many market pundits say that you should ignore the market action of August and wait until after Labor Day to find out what investors really think.

This year, we have the added variables of a market on Fed watch and the uncertainty of the looming presidential election. Both have the potential to drive volume in either direction, whether it is investors taking a “wait and see” attitude by staying away or investors becoming fearful and selling shares in high-volume waves.

Regarding the market being on Fed watch, the Federal Open Market Committee (FOMC) concluded another of its two-day meetings today and made no changes to its monetary policy. The current forecast is that the next rate hike will not happen before 2017. The next FOMC meeting occurs September 21, and the one after that concludes November 2. Although the Fed claims it is an independent body and free from political influence, both of the next two meeting are likely to be too near to the election for any meaningful change in policy.

Real Estate ascended the final step and reached the top of the sector rankings. Telecom, which was the first-place occupant during the past edgecharts-2016-07-27two weeks, remains highly ranked with its second-place status. Materials held steady in third, but the remainder of the field saw some significant shifts. Technology was the big winner, surging five places higher to capture fourth, as most of the sector’s earnings reports are coming in better than expected. Health Care had a two-place improvement to fifth, Consumer Discretionary climbed off the bottom to claim eighth place, and Financials edged a step higher. Although high-yielding sectors such as Real Estate and Telecom still control the top, Utilities slipped to sixth. Energy took the biggest hit. It lost more than half of its momentum, plunged five places lower in the rankings, and now sits alone at the bottom. The Energy sector is under pressure because crude oil closed below $43 a barrel yesterday amid renewed oversupply concerns.

Small-Cap Value still owns the top of the style rankings, although its margin over Small-Cap Blend has now disappeared. Small-Cap Growth moved up a notch, clearly making the Small-Cap trio the dominant force. The small-size factor is evident across the spectrum, as the three Mid-Cap segments closed ranks on fourth through sixth place. Mid-Cap Value moved down from third to make room for Small-Cap Growth, Mid-Cap Blend climbed two places to fifth, and Mid-Cap Growth jumped four places higher. These movements pushed many of the big company categories lower. Large-Cap Value slipped two places, Large-Cap Blend fell a spot, and Mega-Cap dropped two places to the bottom.

The global rankings are extremely steady. Last week, there were no changes to the relative-strength ordering versus the prior week. Today, just two categories swapped places, while the other nine held their positions. Latin America remains at the helm and continues to hold a significant margin over the other categories. There are anecdotal observations of host countries receiving a pre-Olympics stock market boost, but I am not aware of any empirical evidence. The 2016 Summer Olympics get underway next week, even though it is now the middle of winter in Brazil. Emerging Markets occupies the second-place spot, Pacific ex-Japan is close on its heels, while China and the U.S. round out the top-five global categories. World Equity and Canada swapped places, as Canada lost ground due to weakness in the Energy sector. The Eurozone transitioned from red to green, and was the last category to shed its negative momentum. However, it has not accomplished this task in a convincing manner, and it is vulnerable to slipping back into negative territory.



The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

FOMC press release (7/27/16)


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