Why Am I Bored Right Outta My Skull?

by CC March 19, 2012 12:45 pm • Commentary

Bloomberg has a nice article chock full of market measurements including volatility, trading volume and correlation as they stand now and over the first few months of the year. I wanted to highlight some interesting stats from the piece. First, here’s how the recent actual volatility stacks up historically:

Daily prices changes in the Standard & Poor’s 500 Index are decreasing the most in eight decades, shrinking to the smallest since 1995 when investors abandoned stocks just before the biggest rally ever.

The benchmark gauge for U.S. equities has gained or lost an average 0.46 percent a day this year, compared with 1.04 percent in 2011, the biggest reduction since 1934, during the Great Depression, according to data compiled by Bloomberg.

Valuations as measured by cumulative PE has also compressed and compares similarly to 1995:

The S&P 500’s price-earnings ratio has dropped to 14.5 from 24.2 in December 2009, mirroring its retreat to 16 from 26.5 in the 32 months ended in January 1995. Stocks soared that year, with the index gaining 34 percent for an annual return unmatched in the last half century.

The strong correlation in the market has also crashed from the crazy levels we were seeing this past Fall:

The so-called correlation coefficient for S&P 500 members fell 44 percent to 0.43 on March 5, the biggest retreat for any two-month period since at least 1980, according to the 50-day rolling average of Birinyi data. A coefficient of 1 means all 500 stocks move together.

Short interest has fallen as well:

New York Stock Exchange short interest as a percentage of total shares outstanding has fallen every month since September, to 3.29 percent in February, the lowest level since March 2011. Before that, short interest was last this low in October 2007, the data show.

As a result or perhaps causing some of these statistics is declining trading volume:

An average of 768.44 million shares a day changed hands on the NYSE in the 50 days through March 5, the least since 1999, data show. Volume on all U.S. exchanges fell to 5.23 billion on March 12, the lowest daily level of 2012 and the smallest total excluding holiday weeks since Bloomberg data began in 2008.

Taken together these statistics paint a confusing picture of where the market is going next. The tiny volume and low short interest has to be a little worrying to bulls, there may be too much complacency amongst investors right now. On the other hand, if everyone is expecting a pullback it usually doesn’t come. Here’s stats on where analysts are right now:

Wall Street strategists are more bearish now than they’ve been at this point in any year since at least 2006, data compiled by Bloomberg show. The S&P 500 will end 2012 at 1,357, 3.4 percent below last week’s closing price, according to the average of the 11 firms surveyed by Bloomberg.

Keep you eye on some of these market measurements. Operation Twist is scheduled to end in June and my gut tells me that QE3 is going to be difficult for the Fed to pull off politically. Hopefully the reasons are from a steadily improving economic picture and not fear of election year shenanigans.

On the site we see reasons for a short term pullback as we think stocks have gone too far too fast. We’re set-up in a number of ways for a pullback of 5-10% in the market. Longer term we’re staying agnostic as we see a steadily improving economy but one that isn’t reason for breaking out the champagne just yet. This view is fairly consistent with what most on the Street are feeling. That is a little worrying though because under those types of scenarios the market can squeeze higher while investors pile in fearing they’ve missed something. If there is a pullback we’ve been looking at a ton of single stock names to put trades on in. We’ll start highlighting some of those names we’re looking at in the upcoming days.