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Light Volume Has Traders Complaining

Trading desks idle as light volume continues. It started on November 1st — sell-side desks started seeing a drop in trading volume, and it has continued through the month. What gives?

The simple answer is that hedge funds have moved to the sidelines. They took some profit and flattened out their exposure at the end of October, which resulted in a pickup in volume and a decline in the S&P 500.

Why have they moved to the sidelines? Because many are up 30 percent or more, and they're happy to end the year right here.

One sell-side trader who has many hedge fund accounts told me this morning: "I think that a lot of hedgies had such bad years last year that are striving to preserve their struggle/performance back to their high water marks....also have seen a bunch adjust beta in their portfolios.....selling high beta and replacing with low beta names to maintain equity exposure but give themselves less of a downside risk, with names like Merck, Pfizer, Lilly."

But wait, the S&P is up 6 percent this month--how does it go up if buying interest is so anemic? There's always two sides to a trade, and it's very clear that much of this is advance is due to an absence of sellers. Traders may not be buying, but after October 31 they also stopped selling much.

Not surprisingly, technicians do not look upon this trend with favor. Lowry, the oldest technical analysis service in the United States, wrote in a note to clients this morning that "Sluggish Demand and light (and decreasing) volume are typically not characteristics of a dynamic rally."

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