‘Bailout Nation’ Author Says Correlation Killing Volumes

Barry Ritholtz, author of the bestselling book Bailout Nation, said yesterday he expects equity trading volumes to remain low for the foreseeable future due to the rampant correlation in the stock market.

Speaking at the Nasdaq Marketsite as a part of the Dow Jones Expert Series, Ritholtz said correlation has helped to depress trading volumes, since it has taken away the benefits of picking individual stocks. He noted that low volumes have contributed to the closing of formerly robust trading firms, most recently Ticonderoga Securities.

“A lot of that has to do with low volume, which is tied to high correlation,” Ritholtz said. “There’s no distinguishing one stock from another. Why spend a lot of money on commissions?”

 Ritholtz, who is also chief executive officer and director of research at online quantitative research firm Fusion IQ, said we are currently in the midst of a secular Bear Market that will probably last about 10 to 15 years.

Though the market is now reasonably valued, the public is not going out and buying stocks, and Ritholtz said there is not just disinterest in equities, but a visceral dislike. It is impossible to know when that might change, he added.

“When people ask me when the secular bear market is going to end, I like to say sometime between 2018 and next Tuesday,” Ritholtz said.

Ritholtz also believes the rise of exchange-traded funds has contributed to greater correlations, and thus lower volumes. When a whole index is more and more trading as one, there is less and less incentive for selecting individual stocks, he said.

“The only time to own a stock is if you believe it’s going to outperform the index,” said Ritholtz.