One of the most important factors in economics is the balance between supply and demand. Too little supply and too much demand leads the price of goods higher. Too little demand and too much supply means a drop in prices. It is through the imbalance of the first description that observers witness the forming and then eventually, the gradual deflation or outright bursting of bubbles. This phenomenon has been played out countless times and one need only look to recent examples in the real estate market or the gold market to see what happens when demand dries up. The stock market is the quintessential example of supply and demand, and what is developing currently is very unnerving.
Volume is the key to demand. The number of shares bought and sold on a given day indicates the interest of investors in a company's stock and in the market overall. Consider that from January 2008 to the September 15, 2008 collapse of Lehman Brothers, the Dow Jones Industrials reported an average daily volume in the in the neighborhood of 300,000,000 shares. The market breadth was evenly spread and the market was breaking new highs. Today the market continues to break new highs but from January 2, 2013 to November 13, 2013 the average volume for the year is roughly 85,000,000 or nearly a 72% decline.
A little buying pressure can move a stock dramatically upwards. If the volume is light but weighted in one direction it can send a stock irrationally higher or lower. There are few things to consider when looking at the current market. First, we must assume that the majority of individual investors who were devastated in the crash of 2008 have yet to recoup their losses and return to the market. Secondly, only a few high priced stocks are moving higher. Stocks that trade over $100.00 per share (or over $1000.00 on the S&P) are purchased by forces greater than most individuals. This leaves mutual funds, institutional investors and hedge funds in charge of the markets and their selections consist of what is moving; and what is moving is what they are buying. Today, on a day where the Dow closed up 70 points and hit another new high; 14 of the companies listed closed up with less than a .50¢ gain, 6 closed above .50¢ but less than $1.00, 6 closed negatively, and only 4 closed above $1.00. All on light trading volume.
The last thing to look at is margin. The current market has the highest margin debit balance in its history. When markets crash, margin calls are the reason. Investors who are over leveraged on margin must either bring in funds or sell stock (sometimes two to three times the amount they have borrowed) when the margin call comes. This is one of the reasons many individual investors have not been able to participate in the market after 2008.
It is hard to say if a market bubble is now forming or about to burst, but there are enough warning signs pointing to dangerous conditions on Wall Street.
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