The stock market's "turnover bubble" isn't as bad as it sounds


Every time you hear words “speculative behavior” used to describe a bull market in stocks,  you should sit back and look at the data carefully.

  1. “Speculative behavior” is mostly code for “the market has gone up a lot, I’ve missed out on a lot of its gains, and this is a bubble but I don’t know when it will top”. In other words, calling something “speculative behavior” is not useful for making trading decisions. Calling something “a bubble” tells you NOTHING about when the market will top.
  2. Nominal data always looks like “speculative behavior” because inflation causes numbers to go up in the long term.

Some investors are concerned about the increase in the dollar value of shares traded in the S&P 500 (price of stocks * volume)
As the following chart demonstrates, the only times the dollar value of volume was this high ($3 trillion) was near the last 2 bull markets’ peaks. “This is a sign of speculative behavior” they say.

Except when you look closely at the data, you’ll come to 2 very different conclusions:

  1. When the dollar value of volume first became this high (in 1999 and 2006), the bull market in stocks still had 1 year left. You need MULTIPLE quarters of high volume before (i.e. A LOT of speculative behavior) before the bull market can top.
  2. This is a nominal value. It will forever trend higher in the long term because $3 trillion today is not the same thing as $3 trillion 18 years ago.

In fact, CPI is 48% higher today than it was in 1999. This means that $3 trillion today is actually equal $2 trillion in 1999 dollars (inflation-adjusted). Suddenly the “surge in speculation” seems a lot less speculative. Nominal values mean nothing. Real (inflation-adjusted) values are more important.
A better indicator for “speculative behavior” in the stock market is just VOLUME. This ignores the price of stocks. The dollar value of volume will forever trend higher in the long term simply because stock prices trend higher on a multi-decade time frame.
This chart demonstrates that the volume of shares traded on the NYSE has actually declined since 2007.

This chart demonstrates that the volume of shares traded for the S&P 500 has been flat since 2007

This chart demonstrates that the volume of shares traded on the NASDAQ has been flat since 2007.

Volume is a better measure of speculative activity in the stock market than the dollar value of volume. The dollar value of volume is mostly just a function of the stock market’s price.
Right now, volume is not “surging”. This is not a sign of “speculative behavior” in the stock market.
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2 comments add yours

  1. “Speculative behavior” is mostly code for “the market has gone up a lot, I’ve missed out on a lot of its gains….”
    ahahahaha! It is so true!!

    • The majority of professional hedge funds have underperformed buy and hold in the past 10 years

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