ETF Trading Volume Falls With Stocks

Despite the S&P 500 Index’s 4.4% rally in January, the second best month for stocks over the past year, the actual volume of shares traded fell sharply, reports Reuters. Daily volume dropped 15% year-over-year in January, and plunged 26% from a high in January 2009.

Stock market technicians consider volume an essential ingredient for long-term moves. The low volume typically means the recent gains are not sustainable.

Many attribute the low volume to the low volatility in the market, which led hedge funds and other high-frequency traders to sit on the sidelines. Reuters then says strategists think the low volatility will bring in large institutional investors and small retail investors, who will push the market higher as they put some of the cash they’ve been afraid to invest back to work.

No surprise then that the trading volumes in ETFs fell as well, according to J.P. Morgan. And not just ETFs holding stocks, but across all asset classes. ETFs that track stocks, bonds and commodities saw a 36% drop in trading volumes in January compared to the average daily volume in the second half of 2011.

This makes sense if you believe that hedge funds, frequent users of ETFs, have been sitting out the rally.

CNBC’s Bob Pisani then sets a up a straw man by asking if ETFs are responsible for the lower trading volume on the stock market? He knocks down the straw man, with a no that should be obvious to anyone who understands ETFs.

What’s really sad is that some of the traders Pisani talks to think this is the case. But then again, few traders are rocket scientists. A friend of mine, an Ivy-league educated trader, couldn’t even explain the basics of supply and demand even though that was the entire basis of his occupation. Of course, after the screw-up with the focal point on the lenses of the Hubble Telescope it appears even America’s rocket scientists aren’t rocket scientists.

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