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Tumbleweeds Blow as Light Volumes Turn Wall Street Into Ghost Town

Wednesday, 22 Aug 2012 | 11:40 AM ET
A concerned trader on the floor of the New York Stock Exchange.
Timothy A. Clary | AFP | Getty Images
A concerned trader on the floor of the New York Stock Exchange.

A summer August is typically never that active on Wall Street. However, this month’s volume is on track to be extraordinary light, calling into question the legitimacy of the recent rise in stocks and threatening the profits of some market’s participants.

Average daily volume this month is 5.7 billion shares, the lowest monthly average since September 2007, according to a report from Sandler O’Neill & Partners. Three of the five days this year when volume was below $5 billion occurred during this month alone. The other two days preceded major holidays.

“It’s only likely to get worse in the next two weeks,” said Richard Repetto, the firm’s exchange and trading analyst, in the report. “Despite rising equity markets, investor confidence remains low.”

The S&P 500 touched a four-year high on Tuesday. That followed a rally that began in June on optimism the European financial crisis would be contained, and the Federal Reserve(explain this) would embark on more stimulus soon.

Despite the run at the new high this week, equities have basically stalled this month in a small trading range. And retail investors continue to shun stocks for bonds instead.

“This low volume rally should be sold and I expect a correction in the market to take place in the new few months,” said David Greenberg of Greenberg Capital. “What goes up on air tends to fall like a rock when the switch is flipped.”

Low Volume, Low Volatility
Keeping a close eye on the market's volume and volatility, with Josh Brown, Fusion Analytics; Lee Munson, Portfolio Asset Management; Oliver Pursche, Gary Goldberg Financial Services; and CNBC's Rick Santelli.

Investors have pulled $15.9 billion from domestic equity mutual funds this quarter so far, according to ICI data cited by Repetto in the report. They’ve put $12.2 billion into bonds quarter-to-date.

Yet with volume hitting such a trough, some other factors are at work, investors say. The trading glitch earlier this month that nearly took down key market participant Knight Capital has caused high-frequency tradingfirms to curb some of their activity, investors said.

That’s a big deal, since computer program trading sometimes accounts for as much as 70 percent of volume on any given day. Trading in August 2012 is on track to be down 46 percent from the same month a year ago, according to Sandler O’Neill.

Facebook’s IPO debacle and uncertainty about the upcoming election were also cited by traders as reason for the tumbleweeds on trading floors.

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“I can't remember a time over the last five years where I haven't felt like I needed to watch how S&P futures were trading over night,” said Brian Stutland of Stutland Equties.

“There is nothing out in the news that hasn't been priced into the market already," he said. "Come mid-September, we will get more idea how people think this quarter earnings will play out, decisions out of Europe, and what the election means for the market.”

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:00 ET on CNBC. Follow @CNBCMelloy on Twitter.




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