The Dow Jones made its last all-time high (BEV Zero) on August 7, and for the past fourteen trading sessions the Dow, moving in tiny baby steps, hasn’t moved further than 2.01%.  Following this market is like watching paint dry, and it’s been that way for weeks.  But about the time you believe you have a market figured out, it always goes that someone changes the rules.  

Somewhere up ahead market volatility will once again dominate the stock market  Ahead of us are days where the Dow Jones can, and will move (+/-) 5% or more in a single trading session. It’s called a bear market, so I spent much of this week’s focus on the Dow Jones 200 Count below, or the number of days the Dow Jones has moved (+/-) 2% or more in a running 200 day count.

Before we do that, let’s look at trading volume for the NYSE (Red Plot below) and the Dow Jones itself (Blue Plot). Trading volume is demand for what Wall Street is selling to the public.  

Maybe not for each individual day; but over time rising demand results in rising market prices; falling demand declining prices. This explains why bull markets are liquid markets, as it’s easy even for large institutions to sell securities in volume at market prices. In bull markets, there are many bidders in the market willing to pay top dollar for what sellers have to offer.  

However, bear markets are illiquid markets, sometimes even for retail traders who discover there is no one looking to buy what they desperately want to sell, at any price.  At the bottom of a big-bear market, there may be no bids at all.

Looking at the insert in the chart below (1979 to 1999), demand for stocks trading at the NYSE increased, and so did the share prices in the biggest bull market of the 20th century.  But beginning in 2000, things became weird.  

At the High-Tech (Red Triangle) and Sub-Prime Mortgage (Red Star) bear market bottoms, trading volume was near or actually at all-time highs.  Before 2000, seeing an ocean of “liquidity” flooding into the stock market at a bear market bottom was unheard of; but so far in the 21st century it’s happened twice.  And in these 21st century bear markets it wasn’t just market demand for the thirty companies that make up the Dow Jones (Blue Plot) that stands out; NYSE trading volume (Red Plot) didn’t collapse either. In fact it was just the opposite.

Another anomaly in the chart above is how from March 2009 to October 2016, just before last November’s election, the Dow Jones surged over 11,000 points on collapsing volume. That’s not supposed to happen, but there it is. 

These are important points to keep in mind, as they prove how for the past seventeen years the stock market has been managed by forces other than natural supply and demand.  When our “policy makers” lose their grip on market valuations, I’m anticipating a historic bear market.  

Will the coming bear market also see an ocean of “liquidity” flooding into it as did the last two market declines?  Maybe at first. But ultimately, I’m anticipating a bear market that operates as bear markets have in the past, where institutions and retail investors will find selling shares at acceptable prices increasingly difficult as the market declines, to almost impossible at any price at the bottom of the bear market.

That really sounds horrible, and it is – if you’re trying to sell.  But for those who have money at bear market bottoms, and have the courage to pay $0.25 for what cost a $1.00 during the bull market, my hats off to them as this is how the game is supposed to be played.