NEW YORK (Reuters) - What if there was a rally, and nobody came?
The S&P 500 .SPX is set to close out its best first quarter in 14 years. The market is up about 30 percent since a low reached in October, but trading volumes are down more than 10 percent from last year, and measures of anxiety suggest little worry about the sharp advance.
The low participation in the rally and the subdued nature has convinced some that the market isn't just quiet, but too quiet. And therefore, a sizable pullback is in the offing.
But so far the S&P has only posted two down weeks in 2012, with the worst fall last week's mild decline of 0.5 percent.
Many investors are downplaying traditional omens of approaching declines and instead are accentuating the market's positives, which they say will keep bullish momentum in place.
"For a regular investor, low volume and volatility shouldn't be a factor," said Donald Selkin, chief market strategist at National Securities in New York, where he helps oversee about $3 billion in assets.
"Volume isn't a concern since if you own a stock, what difference does it make if goes up on high volume or low?"
For March, average daily volume on the New York Stock Exchange, the American Stock Exchange and Nasdaq has been about 16 percent below last year's average, on track for three straight months with a year-over-year dip of 10 percent or more.
While volume has been especially low so far this year, trading has in general been down since the financial crisis, the lead-up to which was marked by some of the most active days ever. Recoveries have historically been marked by light action, another sign that investors need not fear.
"Volume was very low in 2003, when we came out of that bear market, but it then ticked higher as we moved towards the top in 2007, with people throwing in the towel and doing anything to get into the market," said Todd Salamone, vice president of research at Schaeffer's Investment Research in Cincinnati. "Of course they came in at the wrong time."
In fact, 2012's average daily volume of about 6.8 billion shares for the combined NYSE, Nasdaq and Amex fits neatly in the trajectory of increasing volume for the 2000 to 2007 period - with the sharp increase in 2008-2010 crisis years as the anomaly. Daily volume peaked at 9.7 billion on average in 2009, before declining in 2009 and 2010.
Futures contracts suggest investors are hedging against rising concerns, and possibly higher volume, in coming months.
New tensions in the Middle East have called the stability of oil prices into question. World economies such as China are slowing, the U.S. election promises uncertainty, and earnings may be hit by higher fuel costs and reduced profit margins.
Still, there are fewer triggers for an outbreak in worry now when compared with 2008. Accommodative monetary policy from central banks around the world will persist, and for now, domestic economic data are improving.
Investors traditionally like to see volume rise as the market advances because it suggests more buyers - be they institutions or retail investors - are getting into the market.
But Steven Wolf, managing director of investments at the Westport, Connecticut-based Source Capital Group, said the low overall volume isn't the primary concern.
What would be more worrisome, he said, is expanding volume as markets decline. That's a sign of institutional selling known as a "distribution day," and it means large funds aren't confident enough in gains to hold them.
"In the past three weeks, we've seen maybe three or four distribution days, which isn't a terrible count," Wolf said. "We've seen about 10 accumulation days over the same period, suggesting we're not seeing a lot of signs of institutional selling."
LACK OF FEAR IS NOT A REASON FOR FEAR
The CBOE Volatility Index .VIX has recently neared lows not seen since 2007. When the VIX, considered a gauge of investor anxiety, approached these levels last year, it came right before a sell-off that turned into a bear market.
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For a graphic on volatility and stocks, see:
link.reuters.com/qyb37s
For a graphic on volume see:
link.reuters.com/pan47s
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The difference is the rise in the VIX last year was due to news developments. Dramatic negotiations over the U.S. debt ceiling, the Arab Spring revolts and an earthquake in Japan created headwinds that are unlikely to be repeated.
"While the VIX could pop up the low level isn't too much of a cause for concern," said Randy Bateman, chief investment officer of Huntington Asset Management in Columbus, Ohio, which oversees $14.5 billion.
Waiting for a level of activity similar to previous years may be overthinking the rally. Bespoke Investment Group, a financial research firm, on March 13 published a report saying investors should "avoid low volume (rallies) at your own risk."
The firm noted that the S&P 500 had more than doubled in the three years since its post-crisis low in March 2009, with most of the gains coming as volume fell. "Without these days, the S&P 500 would currently be trading at a level of 128, which would be a decline of 81 percent."
"Say what you want about a rally on low volume," they wrote, "but gains are gains no matter how they happen."
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