We hear from the media on a daily basis that there is low-volume trading on the New York Stock Exchange. Low volumes show lack of investor commitment. Lack of commitment in turn means rallies don’t last for long and push to the upside through perceived barriers.
There is no doubt that trading in the US is light and that US investors have good reason not to feel too enthusiastic about their short- and medium-term futures. But I also often hear comments to the effect that trading volumes here in Australia are low (for example, the front page headline of the AFR Market Wrap yesterday). We shouldn’t confuse these two intensities of trading. Some lows are higher than others.
Australian volume is off its early 2009 peak. After all, stocks were then at rock bottom prices. From my perspective, Australian trading – by value or volume – is at a normal level. We have the turnover to support a rally if one ever gets going.
By decomposing the ASX 300 into non-overlapping subsets of the index, I show that the big end of town is doing better than the small cap stocks. Also, by normalising turnover by market capitalisation to produce a churn ratio, I show even more clearly how healthy the market currently is.
So we might want the US to turn up the volume but – while we might not need earplugs – we are doing just fine, waiting quietly.
We only have turnover statistics on the ASX 200 since the end of March 2000. Since the data is somewhat noisy, I show 60-day moving averages in Chart 1 for the ASX 200 and the New York Stock Exchange (NYSE). What a different story.
The NYSE experienced modest growth from the bursting of their tech bubble to the start of the GFC in mid-2007. Volume on the NYSE has now dropped to levels not experienced since 2001. In Australia, it’s about four-fold what it was at the start of the millennium.
It is certainly true that volume on the ASX is well down from the peak of mid-2009 – when stocks were cheap and the market was full of people scrambling to get back in. We are trading at volumes well above all pre-GFC levels.
I have never been a fan at looking at index volumes – if ever there was a case of adding apples and oranges or $70 RIO and $0.40 Roc Oil … Thomson-Reuters also collects turnover by value and, as with volume, for a number of indexes including ASX 20, ASX 50, ASX 100, ASX 200, ASX 300 and the ASX Mid Caps comprising the stocks ranked 51 to 100. By subtracting turnover of, say, the ASX 100 from that of the ASX 200, we get the turnover for stocks 101 to 200. By so doing, we can highlight which parts of the market are most supported. I present the value statistics for five mutually exclusive segments of the market in Chart 2 – again using 60-day moving averages.
Not surprisingly, the turnover by value of the top 20 stocks dominates total turnover. Not only that but its current turnover is very solid. At the other end of the spectrum, the smallest 100 stocks in the ASX 300 (201 to 300) have been going nowhere. The pictures for the other three middle segments are similar in shape and none exhibit the recent growth of the Top 20.
As a final attack on the data, I have divided the five series in Chart 2 by their respective market capitalisations to produce a ‘churn ratio’. I show these ratios in Chart 3. To me, this is the most informative representation of turnover data.
Interestingly, the mid-caps are getting churned the most followed by the Top 20 – leaving the middle 21 to 50 stocks a little underdone. Each churn series seems to have an upward trend with increasing volatility. Some of this volatility is due to the GFC impact on our market. Another candidate could be increased trading from the algorithmic groups but the swings aren’t wild enough to cause me any concern.
The conclusion from this note is pretty simple. Volumes on the NYSE really are low but we are doing just fine in Australia. Perhaps small caps (201 to 300) might be increasingly less liquid but, quite frankly, I don’t ever remember them being easy to trade.
When I couple this analysis with the other things I monitor, the Australian market is waiting quietly for the next rally – albeit a gentle one – but I would love to be proven wrong with a ‘five’ handle on the ASX 200 by Christmas – which is so much less than I expected at the beginning of the year.
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