MOST market reports over the past month have attributed the correction in equities to sudden worries that Western monetary authorities - the US Federal Reserve and the European Central Bank (ECB) - might cease injecting liquidity into their markets.
More recently, China's slowing growth seems to have become a concern as Wall Street tanked on Friday.
Most reports have attributed stockmarket rebounds to pronouncements that suggest that the money taps will remain open when needed, or to economic data surprises on the upside.
It might well be that investors are collectively reacting to changes in bailout news or economic news - whether from China or elsewhere - by selling or buying. And it could really be that markets are so inefficient that they are unable to discount information beyond the next day's revelations by central bank officials, or unable to see beyond the next economic report which may or may not increase bailout odds.
But what's troubling in this scenario is the low volume. Had daily activity been high - somewhere in the region of $2 billion-$2.5 billion every day - we would readily accept that mass sentiment really is tethered to the chance that the Fed will resume its "QE" or quantitative easing programme and/or that the ECB will continue buying bonds to keep bond yields down.
Turnover, however, has been low. In Singapore, $1 billion-$1.2 billion now seems to be the norm, which is about half the totals of January and February. On Wall Street, turnover has also been dwindling and reports on Friday's drop stated that turnover was about 10 per cent below the three-month daily average.
According to one foreign bank which studied historical liquidity data for Wall Street, the reason for the tapering-off of liquidity there is that volatility has fallen, the suggestion here being that volume follows volatility. The conclusion: if and when volatility picks up, so will volume.
In our view, pondering whether volume begets volatility or the other way around is fine as an intellectual exercise, but it doesn't change the fact that poor turnover makes it harder to draw firm conclusions.
Low volume suggests an absence of participation, which in turn indicates scepticism or worry on the part of a sizeable portion of investors.
If anything, when participation levels are low, large price movements are more common, so it could well be that volatility under such conditions is higher and not lower.
Such appears to have been the case as far as the Straits Times Index (STI) is concerned since it can easily lose 30 points one day and regain all of this the next. (It probably hasn't escaped the attention of long-time market trackers that often the largest impact on the STI comes from the Jardine group, whose shares are usually thinly traded.)
Our view is that program traders are alternating between short-selling and covering, using bailout developments or selected economic reports as their reference points. Because activity levels are low, large movements are possible, so the risk-return trade-off is attractive - if the index drops sharply, there isn't much to worry about because short-covering will sooner rather than later inject stability.
Moreover, any news can be twisted to suit one's position - a bad report, for instance, can be used to argue equally in favour of a "buy" or "sell". If stocks are falling when such a report is issued, one can quite legitimately suggest that more bailouts are needed and so it's time to buy; conversely if stocks are rising when a poor report is released, then maybe it'd be time to take profits.
Still, it might be worthwhile to keep an eye on the economic releases due out this week. Increasingly also, European bond yields should dictate what the program traders will or won't do.
But until volume improves markedly, it'd be difficult to draw firm conclusions, other than that many investors are worried and are out of the market.