Does Slow Stock Trading Signal a Bear Market?

Investors love to search for hints of coming market trends. Accurately interpreting some historical precedent when one variable generally signals a broad market outcome can lead to huge gains if the relationship holds. Some analysts believe that when stock trading slows, it means that a market rally could soon reverse. Lately, volume has been relatively low -- is a bear market coming?

Michael Santoli at Barron's notes the recent falling volume and reports:

Louise Yamada, the longtime technical analyst now running her own research firm, last week invoked a standard market tenet attributed to her. "Volume," she wrote, "is the weapon of the bull, historically, and is generally essential to push the market higher."

This is but one reason Yamada says her "antennae are up for signs of any further weakening technical evidence suggesting more than a consolidation ahead." In other words, volume and other stats on the back of the market's bubblegum card are raising suspicion without yet handing up an indictment.

Because it's actually pretty hard to be sure about these things. Trading volume is just one variable, and the markets are very complex.

An alternate explanation for why trading volume is down could merely be enhanced uncertainty. If investors have become more nervous about the recovery's strength, then some may be taking a break from buying more stocks. There are three reasons why there is more uncertainty in the market now than earlier this year.

Market Shocks

In recent months, some pretty major market shocks have hit. A terrible earthquake hit Japan, revolution broke out in the Middle East, and oil prices began rising steeply. All of these factors could negatively affect the global economy and serve as setbacks for the recovery.

Monetary Policy

The latest round of monetary stimulus from the Federal Reserve will end in June. At this time, the central bank hasn't clearly articulated its plan for the summer and onward. If it decides to continue its expansionary policy, then markets will cheer. If it begins a tightening campaign, then stocks may sink.

Fiscal Policy

Gridlock in the U.S. government usually pleases markets. This time around, however, the loud cry for deficit cutting has made compromise more unavoidable than usual. If budgets are cut too deep, then lost public sector jobs will begin neutralizing the new private sector job gains. Investors may worry that too much austerity could create a strong headwind for the recovery.

All of this new uncertainty doesn't mean that investors will begin liquidating their portfolios -- yet. The weak trading volume likely indicates that they've noticed some troubling obstacles in the way of the recovery strengthening. For now, the market may have a wait-and-see attitude about these newly introduced variables. If they begin to cause the economy to sour, however, then a bear market could be quickly upon us.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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