Flight to Liquidity
Those ETFs look pretty good about now...
By comparing the volume in these ETFs to the volume in the underlying stocks, we can see how much the ETFs are being favored over and above the underlying securities. In the chart below, I have shown how much volume in SPY is "excess" compared to the volume in the underlying components of the index. At times of great uncertainty, such as March '01, September '01 and July '02, volume in SPY exploded compared to that of the underlying stocks. It was also very high at the lows in March '03 and March '04. On the other hand, volume in SPY dried up - showing relative complacency and lack of a need for hedges - at most of the market peaks seen over the past few years.
Currently, we have seen a pretty hefty flow of volume into SPY compared to the underlying stocks. While the current level of "excess" volume is high compared to other readings over the past few years, it is not extraordinarily high like we saw a couple of months ago. When we compare QQQ volume to that of the stocks of the NDX, however, we are currently seeing the largest "excess" ETF volume over any other time in the past two years. These volume patterns would support a rally at any time, but I don't believe are good reasons in and of themselves to count on one immediately.
This is by no means a perfect indicator. Like everything else, it has had some failures along the way. Also, its history is relatively limited, so it's difficult to know if this is a recent phenomenon that will peter out, or if it is here to stay. Personally, I think it captures a market truism - that investors flee to liquid instruments in times of great uncertainty - so will continue to be consistently effective.
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