first majestic silver

Volumes Tell A Story

October 10, 2001

In an automobile it is the horsepower that spins the wheels and makes spectacular clouds of smoke and long black drag strips on the tar; but it is the engine's torque that keeps the vehicle forging ahead when the going gets tough and the gradients get steep.

In markets it is the price action that attracts all the glamour and whistles of excitement and joy or, perhaps, the sighs and groans of despair. But it is turnover that tells the true story of what is really happening in the market - of the weight of funds behind a ruling trend or behind a change in trend.

Much can be learnt from the price action on Wall Street since the markets re-opened for trade following the terror attack on the US, but even more is told by the heavy volumes that have been experienced almost every day for the first two weeks.

The statistics

According to the NYSE statistics (obtainable from www.nyse.com), 7 of the 10 heaviest trading days ever have occurred since September 17 when trading restarted. In other words, 7 of the 10 trading days during those two weeks count among the 10 most heavily traded days on the NYSE of all time.

The data for the ten most active days and for the ten days with the most active first hour of trade are as follows:

with the trading days since the resumption of trading on September 17th highlighted.

Observe that there are only two recent days when the first hour of trade recorded volumes that warrant inclusion in the most active list, with the top of the order 21st September as a day of Three Witches - generally days on which turnover is exceptionally high and, with one exception, that on 4th January 2001, all the other fast starting days were also days of Triple Witch expirations, when futures and options on futures and shares expire.

The 4th January 2001 is also the only trading day that inserts itself among the 6 days of highest turnover over the past two weeks. Trading on January 4 was, of course, heavily influenced by the first cut in rates of the current series - a surprising 50 bp reduction, between FOMC meetings, and the first of nine so far. The most recent was another 50 bp cut at the Fed meeting on 2nd October, which places rates at record lows since 1962, when the Federal Reserve began to use interest rates as a means to regulate the economy.

Let us look at a few more statistics before we consider whether the rate cuts may achieve their desired end - primarily to keep a floor under the stock market and secondly, to inspire new spending, through easy and cheap credit - or whether the Fed is pushing on the proverbial string.

Turnover during the week ending 21 September, the first week when trading resumed, was 10.52 billion shares, with 8,206 billion during the last week of September. The four next busiest weeks in the history of the NYSE, all of which occurred in 2001, average around 6.8 billion, just two thirds of the record week and substantially less even than the last week of September. The second half of September was truly very busy.

The daily average price of shares traded on the NYSE varies around $35 at the moment. This figure will be used in the calculations that follow.

Who is buying the shares?

As is known, the Federal Reserve provided masses of liquidity - rumours speak of up to $200 billion, with $120 billion also mentioned, perhaps closer to the mark - and the NYSE changed its rules to provide US corporations greater leeway to purchase their own shares and thus provide some support in a market where supply was expected to outstrip demand by a wide margin.

The objective of this analysis is to estimate the number of shares that were purchased - using the Fed's probably quite cheap money - by corporations and perhaps by the large investment banks during the last two weeks of September.

As a start we look at the average daily turnover of the last five trading days before 11th of September, namely was 13366 shares. With the Dow Jones declining for most of that time, one can use this daily volume as a measure of natural demand prior to events of 11 September. In a falling market, turnover is equal to active demand, while the converse is true of a rising market, where willing sellers determine how many shares are traded.

The question of course is what the natural demand from investors and funds were during the last two weeks of September. Logic says that initially at least buyers would be scarce and they may only have returned to the market after prices had fallen substantially. From then on, the number of shares purchased for natural reasons may well exceed the average demand preceding the tragic events of the 11th.

It therefore sounds reasonable and conservative to state that over the two weeks under analysis natural demand was equal to the daily average preceding the 11th, namely 13366 shares/day. That of course gives a round total of say 13,4 billion shares purchased for natural reasons by investors and funds during the last two weeks of September.

The total number of shares traded during those 10 days were 18,7 billion, which implies that as a conservative estimate about 5,4 billion shares were purchased by parties who were trying to hold a floor under the market.

The average price of $35 of the shares traded on the NYSE is also conservative for the purpose of this analysis. Support would primarily be aimed at the index stocks, both Dow Jones and selected stocks from the S&P500, and it seems reasonable to suspect that their average price would be somewhat higher than the average for the whole stock market.

This implies that about $190 billion dollar have been spent over 10 days in trying to keep the NYSE on as even a keel as was possible under the circumstances.

Now $190 billion is definitely not peanuts. The amount approaches 2% of US GDP. If one assumes an even contribution to GDP over the full year, a two week period delivers approximately 4% towards total GDP - which means that of every $10 of contribution towards GDP during the last two weeks of September, an amount of $5 was being spent in support of the NYSE.

And that excludes the cost of any similar effort to keep the Nasdaq from cratering, which may well be of the same order of magnitude .

Put another way, during these two weeks stocks equal to 4 days of turnover on the NYSE, at the average of 13366 shares/day, were accumulated to support the market. These stocks are now waiting in the wings to be sold as soon as the market stabilises again. If the market rises consistently, the selling might be gradually. However, if the steep slide resumes, the unwilling holders of these stocks may well be forced to sell quite urgently, before prices collapse further and thus add severe losses to the cost of borrowing the funds with which these stocks were purchased.

Conclusion

It is a truism that nothing is really impossible when it comes to the markets; perhaps the bottom is really in place as so many pundits claim. But if investor sentiment had become so negative that it may have cost substantially more than half the GDP generated during the final days of last month to keep the NYSE and Nasdaq afloat, and by now more than 4 days of NYSE turnover are already waiting to be off-loaded on the market as soon as it recovers - and perhaps some of it even dumped in haste if prices decline further - the odds definitely do not now favour an opportunity to buy and hold.

Keep in mind that another 10% decline in the value of the Dow Jones would imply a paper loss of $19 billion for whomever is holding these shares, apart from losses already being accumulated on stocks bought early during this period at much higher prices.

And even for the US Treasury and the Federal Reserve losing $19 billion will definitely not be peanuts - for anyone else, even collectively, having to write down that amount could be a disaster..

If, against the odds, it all works out and the NYSE recovers, the buyers of these stocks will heave a great sigh of relief while they chalk up the profit. But another 10% fall in the Dow is the stuff on which nightmares come riding in.


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