Saturday, April 11, 2009

S&P 500 Index Volume vs SPY Volume

a subscriber writes:

Hi Kyle,

not sure if you are familiar with this site, but here is an interesting article about the various components of the Crowd.

golly, this 'Zero Hedge' blog is getting popular, isn't it?

anyway, among other things in the link above, the author points to declining volume on SPY, the big ETF that tracks the S&P 500 index. I notice however that volume on the actual underlying stocks that comprise the S&P has held up fairly well recently.

while the volume moving average has turned lower, overall volume has hardly evaporated.

I also notice that the relationship between SPY volumes and those of the underlying index has subtly shifted over the last few months.

(click image to view full size)

much of the volume on ETFs in general, and SPY in particular, stems from hedging operations, therefore it makes sense for SPY volume relative to actual index volume to increase and decrease in tandem with market volatility. the inverse correlation between the VIX and relative volume of $SPX to SPY is pretty apparent.

these observations do not necessarily contradict the Zero Hedge liquidity thesis. frankly, I also think the Stock Markt will be in for more rough times after this rally has run its course. the question is when does the rally end? it could be pretty soon, but despite the incessant Perma Bear jaw-boning over the last couple weeks, the structure of the Stock Markt as per the indicators I track remains rather positive. it may be that the Markt turns swiftly lower without pre-warning from the indicators, so traders with a long-side bias should be careful to employ proper risk management as the indexes approach our price targets. however, traders with a short-side bias would do well to keep on the sidelines until the Markt approaches our targets and/or some indicators turn bearish.

Update: I should mention that this is the type of analysis I usually reserve for the newsletter, but since some friends have been nice enough to point out that I 'absolutely suck at marketing,' I figured I should put something in public that makes it sound like I have some clue about the workings of financial markets. if you think you might find value in reading this type of analysis on a daily basis, please subscribe to my newsletter. use the payment button at the top of the blog, or contact me with questions. (contact info on my blogger profile -- click here.)

Correction 4/11/09 10:35PM: this kind of embarrassing, but I mismatched two different Zero Hedge posts above. the reader sent me a link to one, and I some how relinked it to another and commented on the wrong post. oops. hard to keep up with Mr Durden's hundred posts a week... anyway, here is the link for the post my reader had in mind:

Friday, April 10, 2009
The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans

as a friend noted, "i thought the whole point of black swans was........."