Traders Cooperative

[Joe Stocks]

The Incredible Shrinking Stock Exchange

The Dow Jones Industrial Average is up 675 points since the open on September 18th, and the close on October 10th. Investors must be extremely excited about the prospects of the market going higher – but are they?

I did some research on NYSE volume for the month of September. NYSE volume numbers are easy to find as they are reported weekly in the Program trading reports as average daily volume for the reported week. Much has been written about the market going much higher. I don’t see it happening unless more ‘retail’ volume comes in. Without retail, the mega traders are simply trading amongst themselves, hoping to skim off some profits from time to time. They need the retail investor’s participation to make the big bucks.

For the numbers below I took the average daily volume and subtracted those shares involved in program trades. I took both sides of the program trade as that is how NYSE calculates its total volume.

  
                                         Average Daily Volume*               Program Trading 
 Week of 9/5 -9/8/06           1,172. million                                    58.8% 
 Week of 9/4 -9/4/07              889. million       Down 24%            68.6% 
  
 Week of 9/11-9/15/06         1,350 million                                     63.2% 
 Week of 9/10-9/14/07            850 million       Down 37%             67.8% 
  
 Week of 9/18-9/22/06         1,378 million                                     56.6%       
 Week of 9/17-9/21/07            772 million       Down 44%             76.4% 
  
 Week of 9/25-9/29/06         1,371million                                       59.4% 
 Week of 9/24-9/28/07            778million        Down 43%              71.4% 
 

* Average daily volume less program related trade volume

Retail volume is down significantly from 2006. One would think with the DOW up 675 points from the 18th of September interest rate decision that investor interest would be stronger and we would see evidenced with more volume. I think to see the market go higher we would need to see more interest from the ‘retail’ investor/institution, an indication that there is strong support for an upward move. With the low volume it is easy for the program traders to skew the market upward. However, eventually without follow-up buying by retail to produce trading profits, the program traders will then need to remove their support to manipulate the market downward to try to profit from a downside move. Once that is done the process repeats itself - each time trying to convince retail that they should be long the market. Unfortunately for the program traders, volume shows that retail has wised up and no longer taking the bait.




But how could retail be up 675 points in just 17 trading days without retail?

The large government support investment banks did much of it, if not all, during non-market hours. The DOW gained most of the points in just the first half hour of trading due to gap up opens. Keep in mind that just six large trading firms are responsible for typically 60% or more of all program trading in any given week. Those same brokerage houses probably control most of the futures market. And they do work together. That is proven with their guidelines in their alliance under the Counterparty Risk Management Group. They run the futures markets up overnight on low volume, and they keep a bid underneath it into the open. Then they sell into strength but always keep an underlying bid under the market to keep most of the overnight gain.

I looked at the last 17 days of trading from September 18th interest rate reduction, to the closing bell on October 10th. I asked myself how many points had the DOW gained in those days from the close of one day to the end of the first half hour of trading the next. I used the 10am close out to account for any momentum that a gap gain or loss would have in the first half hour. This equaled 8.5 hours of market trading out of a total of 110.5 hours of market trading during that time frame. The DOW gained 457 points during this time – 68% of the total 675 points

I then added in the two hours of trading after the Federal Reserve dropped interest rates on September 18th. That was 253 points. Now we have 710 points added in just 10.5 hours of trading – more than the total gain for those 17 days. In other words, the DOW lost 35 points in the other 100 market hours. If you want to go on, you can add another 108 points for the two hours of trading after the FOMC minutes were released.

Several weeks ago, Secretary Treasurer Henry Paulson said that although housing was down American should be happy with what they are seeing in the stock market. That’s the plan. Greenspan said himself that the government depends on the support of the large brokerage houses during sub-optimal economic performance. The large mega-banks now control the markets in the short term and keep the market up to give the illusion that the economy is humming along just fine – keep spending that money is what they want you to do. As the NYSE shrinking volume shows, the retail investor may no longer be falling for this government supported ponzi scheme.

Joe Stocks