I normally don't appreciate any outside input on my charts, because outside input has a way of tainting your own analysis, BUT there are times when I am left scratching my head e.g. as seen on the chart below.
Long Term $DJUSTC (Tech) monthly chart going all the way back to before the '08 crash.
What I want you to pay attention to is the ever increasing volume, which seems to peak in 2 year cycles (2018, 2020, 2022, 2024).
If you look closely at the volume; you should also notice that the volume has spiked to new all time highs, in 2005, which broke the 2 year cycle, and you'll see AI pick up on this towards the end of the chat sequence.
Next I'm going to publish 2 Part chat GPT conversation, with yellow highlights.
First: See my simplified question to Grok on this subject matter (volume, and 2 year cycles), before offering a followup, w/the chart.
At the end: I'll offer my conclusion.
@Grok
Question: What's causing stock market volume to increase exponentially, every 2 years?
Answer: There’s no definitive evidence that stock market trading volume increases exponentially every two years. While trading volumes have generally risen over time, the pattern is not consistently exponential or tied to a strict two-year cycle. Several factors contribute to the overall increase in trading volume, but they don’t align neatly with a predictable, exponential doubling every two years. Below, I’ll outline the key drivers of rising trading volumes and address why the “every two years” claim may not hold up.
Factors Driving Increased Stock Market Trading Volume
- Technological Advancements and High-Frequency Trading (HFT)
- The rise of electronic trading platforms and high-frequency trading has significantly boosted trading volumes. Algorithms execute thousands of trades per second, amplifying volume far beyond human-driven trading. A 2017 JPMorgan study noted that passive investors and HFT account for about 60% of U.S. market trading volume, compared to just 10% from traditional discretionary traders.
- These technologies have lowered transaction costs and increased market liquidity, encouraging more frequent trading. However, their impact grows irregularly, not on a fixed two-year cycle.
- Increased Market Participation
- More retail investors are entering the market, fueled by accessible platforms like Robinhood and low-cost brokerages. The democratization of investing, including fractional shares and mobile apps, has driven higher trading activity.
- Institutional investors, such as index funds and ETFs, also contribute to volume, especially during market rebalancing or at the open/close of trading sessions. This activity spikes at specific times (e.g., end of day) but doesn’t follow a biennial exponential pattern.
- Market Volatility and News Flow
- Trading volume often surges during periods of volatility, driven by economic data releases, corporate earnings, geopolitical events, or policy changes (e.g., Federal Reserve decisions). For example, volume spikes at market open due to overnight news accumulation.
- While volatility can cause short-term volume increases, these are event-driven and not tied to a consistent two-year cycle.
- Financial Innovation and New Instruments
- The proliferation of derivatives (options, futures) and ETFs increases trading volume. Options trading, in particular, has grown due to retail interest, with volume reflecting both shares and contracts traded.
- New asset classes, like cryptocurrencies, also draw trading activity, indirectly boosting equity market volumes. This growth is ongoing but not necessarily exponential or biennial.
- Globalization and Market Integration
- Global markets are more interconnected, with cross-border investments and 24/7 trading in some assets increasing overall volume. Emerging markets, in particular, show higher volume predictability due to arbitrage opportunities, but this varies by region and isn’t cyclic.
- This trend is gradual and influenced by economic development, not a fixed two-year doubling.
- Seasonal and Calendar Effects
- Trading volume tends to spike at specific times, like the turn-of-the-month or January effect, due to portfolio rebalancing or tax-related trading.
- These patterns are seasonal, not biennial, and don’t support a consistent exponential increase every two years.
Why the “Exponential Every Two Years” Claim May Not Hold
- Lack of Empirical Evidence: The search results and available data don’t confirm a strict exponential increase in trading volume every two years. While volumes have risen over decades, the growth is uneven and driven by structural changes (e.g., technology, market access) rather than a predictable cycle. Studies on volume, like those in the meta-analysis of 468 estimates, show variability across markets and timeframes, not a consistent doubling pattern.
- Exponential Growth Misconception: Exponential growth implies a constant doubling time, like bacteria splitting or compound interest. In reality, stock market volume is constrained by market size, liquidity, and participant behavior, making sustained exponential growth unlikely. For example, exponential growth in a finite system (like Earth’s economy) eventually hits physical or economic limits.
- Data Variability: Volume data from sources like the S&P 500 or NYSE shows fluctuations tied to market conditions, not a regular doubling. For instance, the 2014–2015 Chinese stock market bubble saw sharp volume increases, but these were event-specific, not cyclic.
- Historical Context: If volumes doubled every two years, the market would have implausible trading levels by now. For example, starting from a baseline volume in 1950, 35 doublings (75 years ÷ 2) would yield an astronomical increase (2^35 = ~34 billion times the original volume), which doesn’t align with observed market data.
Critical Perspective
The idea of an exponential increase every two years may stem from a misunderstanding of market trends or selective observation during bullish periods (e.g., tech-driven rallies). Mainstream narratives often exaggerate growth patterns to attract attention, but they oversimplify complex market dynamics. The reality is messier—volume growth is significant but irregular, driven by technology, participation, and market events, not a mathematical doubling cycle. Always question claims of precise periodicity in markets, as they rarely hold up under scrutiny.
Conclusion
Stock market trading volume has grown due to technological advancements, increased participation, volatility, financial innovation, and globalization. However, there’s no clear evidence supporting an exponential increase every two years. Volume growth is substantial but fluctuates based on market conditions and structural shifts, not a fixed cycle. If you have specific data or a source suggesting this two-year pattern, please share it, and I can analyze it further!
Part 2 -
Includes my follow up question - w/ chart - which points to the volume spiking biannually
@Grok
Question: Volume in the tech sector seems to spike every 2 years, since 2017, what could explain what I'm seeing on the chart
Answer: The chart of the Dow Jones U.S. Technology Index ($DJUSTC) shows trading volume spikes approximately every two years since 2017, as indicated by the "Heavy Selling Volume" and "Heavier Buying Volume" annotations. These spikes occur around 2017, 2019, 2021, and 2023. Let’s break down potential explanations for this biennial pattern in the tech sector, focusing on structural, market, and sector-specific factors.
Observations from the Chart
- Volume Spikes: The volume bars (bottom of the main chart) show distinct peaks around 2017, 2019, 2021, and 2023, roughly every two years.
- Price Trends: The index price follows a long-term uptrend, with notable dips during these volume spikes (e.g., 2018, 2020, 2022), often followed by recoveries.
- Indicators:
- The MACD (bottom panel) shows momentum shifts around these periods, with crossovers indicating potential reversals.
- The Force Index (second panel from the bottom) highlights significant selling pressure during these spikes, followed by buying.
- The CMP (Cumulative Money Flow) shows money flow aligning with volume spikes, indicating heavy trading activity.
Potential Explanations for Biennial Volume Spikes
- Tech Sector Earnings Cycles and Product Launch Cadences
- Many tech companies, especially giants like Apple, Microsoft, and Nvidia, have product launch cycles that occur roughly every 1–2 years (e.g., iPhone releases, GPU cycles). These launches often lead to heightened investor activity as earnings reports reflect sales performance, driving volume spikes.
- For example, Apple’s iPhone releases often occur annually, but major redesigns or new product categories (e.g., 5G iPhones in 2020) can create larger market reactions every 2–3 years, influencing the broader tech index.
- Market Corrections and Rotations in Tech
- The tech sector is prone to boom-bust cycles due to its growth-oriented nature. The volume spikes in 2018, 2020, and 2022 coincide with market corrections (visible as price dips on the chart), often triggered by macroeconomic events:
- 2018: U.S.-China trade tensions and rising interest rates led to a tech sell-off.
- 2020: The COVID-19 pandemic caused a sharp market drop, followed by a tech-led recovery as remote work surged.
- 2022: Inflation fears and Federal Reserve rate hikes hit growth stocks, including tech, hard.
- These corrections, happening roughly every two years, lead to heavy selling (as noted on the chart), followed by buying as investors re-enter at lower prices, creating volume spikes.
- Federal Reserve Policy Cycles
- The Federal Reserve often adjusts monetary policy in response to economic conditions, with rate hikes or cuts influencing tech stocks disproportionately due to their sensitivity to interest rates. Since 2017, Fed policy shifts have occurred roughly every 2–3 years:
- 2018: Rate hikes to curb inflation fears.
- 2020: Rate cuts and stimulus during the pandemic.
- 2022: Aggressive rate hikes to combat inflation.
- These policy shifts cause market rotations out of and into tech, driving volume spikes as investors adjust portfolios.
- Sector Rotation and Rebalancing
- Institutional investors and index funds often rebalance portfolios periodically, especially in response to sector performance. Tech’s outperformance (as seen in the long-term uptrend) can lead to profit-taking every couple of years, followed by re-entry during dips.
- The two-year cycle might reflect a behavioral pattern among fund managers, aligning with biennial rebalancing or strategic reviews, particularly in a high-growth sector like tech.
- Speculative Trading and Retail Investor Activity
- Since 2017, retail investor participation in tech stocks has surged, driven by platforms like Robinhood and social media hype (e.g., Reddit-driven trading in 2021). The two-year cycle could reflect speculative bubbles and bursts in tech:
- 2019: Hype around cloud computing and AI stocks.
- 2021: Meme stock frenzy and SPAC boom, including tech-related names.
- 2023: Potential AI-driven rally (e.g., Nvidia’s growth) followed by profit-taking.
- These waves of retail activity can amplify volume during periods of euphoria and panic, often spaced by 1–2 years as sentiment shifts.
- Global Economic Cycles and Tech Sensitivity
- Tech stocks are highly sensitive to global economic cycles, which can have a roughly biennial rhythm due to geopolitical or economic events (e.g., U.S. midterm elections every four years might create alternating years of uncertainty and stability). For instance:
- 2018: Trade war escalation.
- 2020: Pandemic and U.S. election uncertainty.
- 2022: Inflation and geopolitical tensions (e.g., Russia-Ukraine conflict).
- These events lead to heightened trading in tech as investors react to uncertainty, contributing to the two-year volume pattern.
Why Every Two Years?
The two-year periodicity isn’t a universal law but may emerge from overlapping cycles:
- Product Cycles: Tech innovation cycles (e.g., chip releases, software updates) often span 1–2 years.
- Economic/Policy Cycles: Fed policy, elections, and global events often create a rhythm of uncertainty every 2–3 years.
- Behavioral Patterns: Investors and institutions may have a psychological tendency to reassess positions on a roughly biennial basis, especially in a volatile sector like tech.
Critical Perspective
While the chart shows a biennial volume spike since 2017, this pattern may not persist indefinitely. It’s likely a coincidence of overlapping economic, policy, and sector-specific cycles rather than a fundamental law. Extrapolating to 2025 (the current date on the chart), another spike might be expected, but the chart ends before confirming this. Additionally, the “exponential” growth in volume isn’t clear—spikes are significant but not consistently doubling in size, as true exponential growth would require.
Conclusion
The biennial volume spikes in the tech sector since 2017 are likely driven by a combination of tech product cycles, market corrections, Federal Reserve policy shifts, sector rotation, speculative trading, and global economic events. These factors align to create a roughly two-year rhythm of heightened trading activity, particularly during periods of heavy selling and subsequent buying. However, this pattern isn’t guaranteed to continue and may shift with changing market dynamics. If you’d like to explore a specific spike (e.g., 2021) in more detail, let me know!
My conclusion
I'm blown away by the amount of information Grok was able to gather, and organize into 2 pages of concise analysis, in only a few minutes, and it looks like many of us are going to be out of a job, very soon.
What also blew me away is that I didn't expect Grok to not only identify the chart, but to thoroughly analyze it, the way it did.
Keep in mind this is only Grok 4.1 (or something like that). AI is still in its infancy!
I think we can't even imagine where this (AI) is leading, but I suspect it's going to increase productivity, and that's likely to cause runaway inflation at some point. This could be why we're seeing Gold, and Crypto, running as they are, and investors seemly worried about the future status of the $USD as the reserve currency. It could also be that AI presents far more uncertainty than Donald Trump tariffs, and it drives home the point that we are currently in an information war like the world has not seen since WWII.
No comments:
Post a Comment