The foundational support for the US stock market is now quicksand. According to recently released data pertaining to shares and ETFs investor the churn rate for the markets has increased significantly. More than $2.9 trillion worth of the shares of the S&P 500’s member companies in each of the past two quarters. The last time the amount was this high was during the first half of 2008.
Emerging market shares and ETFs are also experiencing churn at levels not seen since 2008.
The elevated churn should be taken seriously. It indicates that shares are being sold by long term investors and are being purchased by short term traders.
When long-term investors exit the stock market shares go from strong to weak hands. After an investor has made the decision to take their long-term capital gains they generally do not get back in until share prices decline substantially and after a recession has begun.
A short-term trader is only interested in producing cash profits as soon as possible and could care less about waiting to take a capital gain. Thus, as soon as they are ready to take a profit the buyers of their shares after the long-term investors have left the market are other short-term traders. Because short term traders are extremely disciplined to utilize stop losses orders to protect them against substantial losses a stock market that is dependent short-term traders for stability has a quicksand foundation. This is exactly what happened during the first eight months of 2008 before the market began to crash in September 2008. See also recent June 30, 2018, article “Global equity funds suffered their second largest outflows ever this week” which further supports that long term investors are exiting the markets.