Light Summer Volume? Ha!

Last week on CNBC, Bob Pisani was warning viewers not to fall for the “light summer volume” meme. That was an example of CNBC giving us excellent advice. The rally that we saw in August is suspect because it came on light volume, and it wasn’t just because the big fund managers were on vacation.

In fact, in August 2007 there was a huge surge in volume over July of 2007. In the table below I list the big-four ETF’s, and two smaller ones that have been leading the market recently. All of them had huge surges in volume from July-August 2007, and huge drops from July-August 2008 (volume numbers are millions):

ETF July 2007 Volume Aug 2007 Volume % Gain July 2008 Volume Aug 2008 Volume % Gain
SPY 3987 6242 +57 7471 4344 -42
QQQQ 2780 3836 +38 4122 2894 -30
IWM 2158 3295 +53 2730 2087 -24
XLF 961 1899 +98 5761 3236 -44
XHB 89 142 +60 167 113 -33
XRT 31 43 +41 191 147 -23

The almighty XLF had the biggest drop – down 44%! Retailers (XRT) and homebuilders (XHB) were down big too.

I spot-checked several more ETF’s, and it was the same story for all of them. Even hot areas like health care (XLV) and biotech (XBI) saw declining volume in August.

Before you argue that we had a high-volume capitulation in July and that we can’t expect August’s volume to match that, go back and look at July 2007. There was a high-volume capitulation there too!

The big money is simply not buying into this rally. Neither is the public.

Will the public eventually get sucked in as they did during the March-to-May rally? If they do, its going to take an even bigger snow job to lure them in. Just imagine what the average person thinks when they turn on CNBC and see a story about brokers who won’t let investors withdraw money until an attorney general sues the broker and forces them cough up.

Wall Street has really shot itself in the foot with the auction-rate securities debacle.

I saw one story on CNBC about Fidelity refusing money to some of its investors, complete with footage of a Fidelity retail store. It wasn’t quite like the IndyMac footage, but some viewers might have taken it that way. If you can’t trust Fidelity, who can you trust?

And it’s not just retail investors. Rich investors have probably heard the stories about hedge funds refusing withdrawals (“gating”), especially since Alan Abelson wrote about it in last week’s Barron’s. A gating clause at a hedge fund works like this: if you stop by the hedge fund office to try and get your money out, the receptionist pushes a button under her desk, and a big iron gate comes down out of the ceiling to capture you. Then she presses another button that releases the hounds to come and dispose of you.

So, now investors are beginning to be concerned about the return of their capital rather than the return on their capital. If you add that to the fact that the American and global economies are decelerating, you don’t really have a good recipe for a lasting rally.

Two More Years Until Housing Bottom

Barry Ritholtz has published a piece by David Merkel on his Big Picture blog where Merkel analyzes the current real-estate disaster. After looking at all the aspects of what typical housing bottoms look like, Merkel concludes that we have about two more years to go.

I can’t see a way to link to specific posts on Barry’s blog, but if you go here, you should be able to find it. You may have to scroll down the page, but the title of the piece is “Fundamentals of Residential Real Estate Market Bottoms.”

Last week, Jim Cramer raved over homebuilder stocks on his Mad Money TV show. Then, the next day, he told his viewers not to buy the stocks. Then on Friday, he told his readers to buy HGX calls. Cramer likes the homebuilders, at the moment, because they are going up – just like he did in 2006.

While the sector may be good for daytrading from the long side at the moment, how far can the stocks really get with gigantic levels of inventory still on the market? And that inventory is only one factor that Merkel cites in the article linked to above.

Friday’s Trading

On Fast Money last night, they were discussing the dramatic surge in XLF call buying, which was considered to be wildly bullish. I consider it to be wildly foolish if the buying was based upon Thursday morning’s GDP number. Can the economy really be expanding while shedding jobs?

Fast Money also thought that Dell’s IT-spending bomb was just wonderful news because it will be creating such good bargains on tech stocks today. Of course, if you are long tech, that’s the kind of thing you would say to keep other traders in long enough for your to get out.

Watch the comments section for updates throughout the day.

Public Runs Screaming from Stocks

I just updated my Mutual Fund Flows chart. Take a look at it.

$18.69 billion was pulled out of US mutual funds in July, a pretty gigantic number. What about August? The official data won’t be out for another month, however the public does not appear to be in any rush to come back in. One research firm is predicting a very modest inflow.

You can also get an idea of how enthusiastic the public is about US stocks by looking at the monthly volume on the major ETF’s. For example, SPY volume plunged dramatically from July to August, whereas in 2007 it surged from July to August.

Thursday’s Trading

After shrieking that the homebuilders had bottomed on the Tuesday edition of his Mad Money TV show, Jim Cramer told his audience not to buy them on Wednesday. Crazy.

Cramer also said that the Fed was out to destroy the economy 1930’s-style with high interest rates. Two percent is high?

Picking on Cramer is too easy, but the man is so bizarre at times, that I just can’t help it.

But the most bizarre thing that I heard on Wednesday was on Fast Money. Quint Tatro admonished traders to conserve their “mental capital” so that they will be rested-up when the market starts “running.”

That’s a curious position to have after a sharp bear-market rally. And when you look out at the sea of weakening economic, financial, and geopolitical factors, you really have to wonder what kind of thought process goes into generating a worry that the market is on the verge of running away to the upside.

Watch the comments section for updates throughout the day.