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Faced with
the current confusing batch of economic signals,
you might have expected investors to wait things
out. After all, markets are supposed to dislike
uncertainty. But over the past few weeks, that
hasn’t happened. In fact, quite the reverse.
One of the
interesting features of world stock markets at present
is the buoyant level of trading activity. Volumes
traded on the NYSE, for example, are up 10.3% on
a year earlier. ASX volumes are up 25% on last year’s
figures. Even allowing for one or two special factors
- for example, NYSE turnover in Tyco International
has been heavy due to concerns about accounting
irregularities - the overall trend is sharply higher.
This is actually an encouraging sign because it
means that investors are not panicking despite the
recent focus on corporate scandals and economic
uncertainties. High trading volumes indicate that
investors don’t agree on the direction of the market.
Trades are taking place because there are plenty
of sellers but the lower prices are attracting buyers.
Brokers would describe it as good two-way business.
As long as this continues, share prices are unlikely
to plunge suddenly. The time to worry is when the
queue of buyers starts to thin out. If share prices
fall on low volumes, it means that buyers are getting
worried too. And that’s often the prelude to a major
market collapse. On these occasions, even mild selling
can cause share prices to crash because there are
so few bid quotes in the market.
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