Retail Sales and Low Volume, Again

Before we get to earnings season, we have to get retail same store sales for March, out on Thursday. Remember, Easter is 20 days later this comps will be tougher, though everyone is looking to make it up in April.

Bulls point out that February sales were better than expected, and that's true, but despite all this talk about "frugality fatigue," it's still not clear how much real pent-up demand there is out there.

There are two wild cards for retailers: gasoline and higher commodity costs. While we have not yet approached $4 a gallon, lower-end consumers are clearly being impacted — even on the NYSE floor, traders are complaining about spending $70 to fill up their cars.

Today (Monday), oil closed at $108.47, up $0.53, the highest close since September 2008.

As for higher commodity costs, no one — not even CEOs of retail companies — know how much they can raise prices to offset higher costs without killing sales.

Lousy Volume, Revisited

What's up with the volume? Traders continue to complain bitterly about the lack of trading interest, but the reasons are easy to see.

On Friday, the first trading day of the quarter, we should have done relatively strong volume of 5 to 5.5 billion shares on the consolidated tape at the NYSE. Instead, we barely broke 4 billion.

Don't let the low VIX fool you: the VIX is down, but the uncertainty and anxiety level is still high. Volume was heavy initially on the Japan quake and Mideast uncertainty as professional traders (hedge funds) reduced exposures; as the market stabilized, there was less trading activity because traders have indeed been uncertain about the direction of the market.

I've identified the reasons for the lack of volume in prior posts:

1) high frequency traders, which make up 60% of the trading volume, are trading less because the Volatility Index is at extremely low levels; these traders primarily use statistical arbitrage as the trading strategy and when volatility is low these trades do not work as well.

2) some of the biggest firms on the street (Morgan Stanley , Goldman ) have closed or are closing their prop trading desks.

3) Retail traders have been trading less because the macro uncertainty (Mideast, Japan) has made it more difficult to figure out what is going on. Patrick O'Shaughnessy, analyst at Raymond James, noted that Daily Average Revenue Trades (DARTs), a standard measure of trading activity, declined 5 to 10 percent at the major online brokers from February to March.

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