Herds and rational behavior

Courtesy of rdan at Angry Bear. 

Brett Steenbarger at Trader Feed has an interesting take on rules of the market for the current decade of market of stocks.

In the chart, I’m looking at a moving window of 60 days and counting the number of days within that window that either have 2/3 or more of stocks traded as advances or 2/3 or more as declines (NYSE issues only). So we’re looking at relatively one-sided days in which advances lead declines (or vice versa) by a ratio of roughly 2:1 or better.

In 2000 and 2001, such one-sided days were the exception; because stocks traded in quarter point increments, many issues remained unchanged. The ratio of unchanged stocks to advancers and decliners has steadily fallen over the years. Now, out of over 3000 issues traded, it’s unusual to have 100 unchanged stocks; in 2000, over 500 unchanged issues were the norm.

Interestingly, the ratio of unchanged issues to total issues traded has fallen significantly since July, 2007, so it’s not just decimalization that has led to the shift. Program trading and the inclusion of more stocks in baskets that are traded–not to mention the inclusion of more stocks in ETFs (including leveraged ETFs)–may well account for this phenomenon. Small cap issues are no longer a market backwater.

The average number of issues traded daily since 2000 has actually fallen. Nevertheless, there is far more money–and far more money managers–chasing the same returns. It does, indeed, appear that they are chasing returns in part by chasing each other. Incredibly, we’re getting close to the point where nearly half of all trading days are relatively one-sided…