Low Volume and Lack of Energy Present Obstacles for Traders

Although the S&P 500 and DJIA are sitting very close to all-time highs, the market has lost substantial energy recently. Selling has been contained, but volume has dropped, and the speculative trading that was almost frenzied a couple of months ago has dissipated.

The dull action is not a technical negative, but Wednesday afternoon there was sudden pressure on small-caps and some leadership names that frustrated traders who have been treading water while they wait for some sort of positive catalyst. It looked like some sort of program trading or rotational movement that wasn’t based on anything fundamental — groups like biotechnology and cannabis were hit the hardest.

For traders, the most notable characteristic of the market of late has been that all the hot themes that existed late last year and early this year have disappeared. Traders were feasting on SPACs, gambling, biotechnology, cannabis, bitcoin-related names, and several other sectors.

It was some of the best small-cap trading in 20 years, but in mid-February, it slowed down as bonds fell, inflation concerns jumped, and rotational action picked up. The poor trading seems to have taken a toll on individual traders that have flocked to social media, and now we see a sharp decline in both volume and energy.

Typically, a shift in action like this is due to economic or fundamental concerns, but in this case, it is just the opposite. Market participants are anticipating one of the biggest jumps in economic growth that they have ever seen as the COVID crisis comes dissipates and the economy returns to normal. Vaccinations in the U.S. are progressing quickly, and deaths and hospitalizations are falling fast.

The big question to ponder right now is when will trading energy pick up again, and when will there be some major themes and hot pockets of action again. Earnings season may help in that regard, but there is just no way to time this. Many small-caps are already washed out, but there are not seeing strong bounces. They are struggling to hold support, and the dip buyers are not doing what they did a few months ago.

As is typical, the market pundits didn’t see this sort of action coming. The sudden shift in energy and flat trading was not how corrective action was supposed to manifest itself. The good news is that frustration has increased, and conditions are in place for some sort of bounce action soon, but for now, we need to deal with lackluster price action.

It is said that the opposite of love isn’t hate, but indifference, and that seems to sum up the market quite well right now.