Trading volume rises, but beware

Here’s another story from the Journal:

Trading volume surged 14% or more last month from July at online brokerage firms Charles Schwab Corp., TD Ameritrade Holding Corp. and E*Trade Financial Corp. Electronic trader Knight Capital Group Inc. also posted a 7.7% increase.

The revival of short-term trading doesn’t necessarily reflect long-term confidence in stocks. That’s because a lot of long-term money is still sitting on the sidelines.

For instance, mutual-fund investors — who generally buy and hold for the longer term — in August plowed 20 times as much money into cautious bond funds as they did into U.S. stocks, a riskier investment. And as of early this month, investors still had as much cash parked in money-market funds as they did a year ago, when the financial crisis was coming to a head.

At the same time, there’s been heavy activity among “leveraged” exchange-traded funds, designed to magnify returns, and “inverse ETFs,” designed to profit when prices fall, says Mr. Repetto of Sandler O’Neill. Both are favored tools among short-term traders such as hedge funds and day traders.

The prevailing tone in the article is that of being cautious.  It stays that way throughout the article and quite appropriately so.  The fact that trading volume is up is not really good news. It merely serves as additional proof to the danger that is forming in the stock market.  So traders, beware. The “animal spirit”, borrowing the term from JM Keynes, is back and they have come back quick.  We can only expect they’d also be gone just as quickly when the time comes.

Source: WSJ

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