Systematic Relative Strength

Thirteen months into one of the most powerful bull markets in history and investors still don’t believe.

In their April Green Book, The Leuthold Group analyzed the average path of trading volumes in the first two years of all bull markets dating back to 1932.  The charts below suggest that one year into a new cyclical bull market, NYSE trading volumes (on a ten-week average basis) should be about 70-80% above the level seen at the prior bear market low.  Recent NYSE volumes, however, have been running about 25% below the levels seen at the March 2009 bear market low.  In other words, volumes now amount to less than half what they have normally been at this stage of a new bull market.

Charts used by permission from The Leuthold Group.

In reviewing the volume trends in each of the 15 bull markets that were studied, the only pattern even close to the 2009-2010 example occurred in the aftermath of the 1987 crash.

The damage to investor confidence suffered during both the 1987 crash and the 2007-2009 meltdown resulted in similarly depressed trading volume.  The impressive gains (76% return) for the S&P 500 since the March 2009 lows still have not been enough to lure investors back into the market en masse.  As we show in our weekly mutual fund flows report, investors are still fighting the last battle and continue to direct money into fixed income at the expense of other categories like domestic equities.

I would like to believe that investors can be persuaded to make investment decisions with greater reliance on logic than emotion, but history teaches us that I shouldn’t hold my breath.  However, great gains can be made on low market volume or high.  For those investors already “in the game” they can find some comfort in knowing that there are still plentiful amounts of money on the sidelines that can potentially drive the market much higher from here.

This entry was posted on Wednesday, April 14th, 2010 at 8:40 am and is filed under Investor Behavior, Markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.