August is known as a quiet month for the stock market, as many institutional investors and traders take advantage of the waning summer to go on vacation. Trading volume dries up, and some large price swings can be attributed to the lack of liquidity, but this news about the concentrated nature of trading is truly odd.
According to Reuters, four beaten-up financial companies -- Bank of America (BAC), Citigroup (C), Fannie Mae (FNM), and Freddie Mac (FRE) -- have accounted for upwards of 40 percent of the trading volume on the New York Stock Exchange to begin this week.
On Tuesday, volume in Bank of America was 238 million shares, slightly below its three-month average, though rival Citigroup traded 973 million shares, nearly double its 502 million three-week average. The surging volume in the quasi-government mortgage companies was more pronounced; volume in Freddie Mac (237 million shares) was six times its three-month average, and volume in Fannie Mae (677 million shares) was ten times its three-month average.
There's an obvious attraction between traders and these lower-priced stocks, which offer a great deal of leverage to an economic recovery. Fannie and Freddie, for example, trade mainly on option value, as does Citigroup. And even with the single-digit share prices, the dollar volume (not just number of shares traded) is staggering. DailyFinance analyzed the typical dollar value in Fannie Mae shares, calculated by the average of the daily opening and closing prices and the number of shares traded. The dollar volume each of the last two days exceeded any figure recorded during 2005 or 2006, when Fannie stock traded between $50 and $60.
These four aren't the only low-priced stocks to see enormous interest during August. Shares of AIG (AIG) have nearly doubled since its 20-for-1 reverse split, and VoIP pioneer Vonage (VG) has seen shares rise 500 percent in the last week. All this calls to mind what Vanguard founder Jack Bogle said last month -- that the market is still one of short-term speculation with absurdly high rates of share turnover. Stocks are rented, not owned, and that means Main Street investors on the outside are at a disadvantage trying to time their purchases.
The big move in speculative stocks is an interesting step in this market rally, as more solid companies haven't participated. But just because a stock trades at a low price doesn't mean it's cheap relative to its worth; in fact, often the opposite is true, and shares are low for a reason. Is this a sign that bullish sentiment has over-run the market, and we should prepare for a pullback?
