Achieving a traditional Santa Claus rally in the next few days could depend on how successfully the inmates can take over the asylum.
The latest weekly data on so-called program trading by professional investors at the New York Stock Exchange suggest that individual investors betting on a year-end rally may have to do more of the heavy lifting on their own.
Trading volume attributed to program trading has declined since stock prices peaked in October.
In the week of Dec. 10-14, the latest data available, 27 percent of average daily NYSE volume reflected program trades, down from 36 percent in the comparable week of 2006.
Given the hammer blows suffered by major Wall Street firms and hedge funds in recent weeks, it is not surprising that some trading desks may be gun-shy.
The NYSE defines program trades as “buy” or “sell” transactions involving at least 15 stocks with a total value of $1 million or more. The word “program” refers to the fact that much of this large-block trading is driven by computer programs that issue “buy” and “sell” signals.
In the latest weekly data available, program trades were tilted slightly in favor of selling as the year draws to a close. In mid-December 2006, “buy” programs were dominant during a powerful year-end rally. Don’t count on that help this time.
Among the dozens of technical indicators of the stock market, program-trading statistics are not regarded as an effective market-timing tool.
For example, just before stocks peaked in October, program trading represented 26 percent of NYSE trades and was slightly tilted toward “buy” programs.
But shortly before another major stock market slump in July, program trading was heavy — as high as 47 percent of NYSE volume in mid-June — and favored “sell” strategies.
Nonetheless, year-end levels of program trading are worth watching. Much of the historic optimism about year-end stock market rallies and typically bullish Januarys relate to the behavior of active individual investors, especially those with taxable stock portfolios.
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In autumn, taxable investors often sell losing stocks in their portfolios to harvest losses to match against taxable gains realized in other stocks. Such tax-loss selling is said to subside near the end of the year, as investors reinvest the proceeds in stocks that look like winners for the coming year.
This quaint scenario doesn’t apply to many professional traders managing money for tax-exempt institutions.
Several surveys of individual investors find them in a sour mood, just like the pros. But there are signs that individual investors are breaking out their stock-picking skills along with the New Year’s Eve bubbly.
The number of stocks reaching 52-week highs versus stocks reaching new lows has been on an upswing. Small-company stocks, which are less subject to program-trading strategies, have done better than large-cap stocks this month, especially in the health-care sector.
Extending this reasoning, perhaps to the breaking point, an optimist could argue that the year-end rally under way depends on morose program traders heading for their resorts and getting out of the way of more upbeat individual investors doing their normal year-end rally thing.
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