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Market Oversold—So Why No Bounce?

Trader's lament: oversold, but no bounce in prices...or volumes. We are oversold; big material, industrial and bank stocks have not had a good month. Some big names are down 10 percent this month:

- Zions

- State Street

- JPMorgan

But stocks are showing no signs of bouncing. Here's the problem:

1) relentless negative economic data. Stocks moved down about 11 AM as the Kansas City Fed Manufacturing Index for August showed a reading of 0 compared to the month before. These are diffusion indexes, so 0 means no growth at all.

Even worse, New Orders were -13, showing a notable dropoff.

New York and Philly also had negative signs for New Orders.

Tomorrow, the Q2 revision to GDP is expected to show 1.4 percent growth, down notably from a prior estimate of growth of 2.4 percent. The reason: weaker housing and retail numbers.

2) trading volumes anemic, below even normally slow summer levels. Professional stock pickers are not trading as much...why? Because they have been unsuccessful this year! That's because it's not about stock picking, it's about getting the macroeconomic direction right.

I'll make it simple: nobody really cares about some deep fundamental strategist's call to buy Pepsi and sell Coke, or some other pair trade, because if the global economy falls apart in October EVERYTHING correlates to 1, EVERYTHING drops. No one cares about Pepsi v. Coke in that environment.

Another reason trading volumes are light: lower volumes usually also mean lower volatility...and that means less opportunity for high-frequency traders to profit. They are trading less as well. In fact, Tabb Group now estimates that high-frequency trading is down from 61 percent of total stock volume last year to 56 percent this year.

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