On Second Thought, Low Volume Seems not So Bad for Stocks

As reported by Rodrigo Campos from Reuters, the U.S. stock-market surge in January may feel to some like having reached a remote mountain peak. It was a lot of work, but there are not many people to celebrate with.

The S&P 500 rose 4.4 percent in January, the second-best month for stocks since 2010. But trading volumes were down sharply – speaking to worries that the market’s gains are unsustainable.

Rather than a cause for concern, however, strategists say the reduced volume may be better down the road for individual investors frustrated in recent years with the fluctuations caused in part by volatile, computer-driven activity.

January, in contrast to wild daily moves during the summer of 2011, was relatively quiet. That kept high-frequency traders and hedge funds that capitalize on big shifts on the sidelines.

If the low-volatility environment persists, it could eventually bring in institutional investors who have largely sat on their hands in recent months, and help move stocks higher.

That hasn’t happened yet and the general public has also stayed on the sidelines. Data from the Investment Company Institute showed net outflows of more than $7 billion in the first three reporting weeks of the year from funds that invest in U.S. equities, while $16.7 billion flowed into bond funds.

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