In rock ’n’ roll, turning up the volume is not only welcome, but is often outright called for. While headbangers may want the volume cranked up, investors may prefer to have the volume set on low instead.

High volume signifies a large amount of interest among investors. Interest often is inversely related to mispricing. Put another way, the more investors there are trading a stock, the more likely the price fully reflects the current market sentiment about the company’s presumed prospects. Take a look at the table to the right. The average amount of money traded daily in the median S&P 500 stock is far higher than not only the median S&P SmallCap 600 stock, but also 90% of all other exchange-listed stocks. Care to guess which stocks are more likely to be mispriced: the S&P 500 stocks or the more than 4,200 exchange-listed stocks not in the index?

(A quick side note: The table to the right uses daily average dollar volume. It measures the number of dollars exchanging hands. Share volume, conversely, tells you how many shares are exchanging hands. Dollar volume is a better comparative measure across stocks because the lower-priced stocks can have higher share volume than higher-priced stocks simply because an investor can buy a greater number of shares for the same amount of money.)

If high volume is the problem, then low volume would seem to offer advantages. Less interest implies fewer eyeballs and therefore a greater opportunity for mispricing. This is in fact the case. Part of the reason value—especially small-cap value—stocks outperform over the long term is that there is less buzz about them. They’re not discussed on CNBC, featured in Money or otherwise talked about much by the various financial media outlets. As such, these stocks are more likely to be discounted and therefore have more potential upside.

Low volume is not without risks. If volume is too low, you may not be able to easily buy or sell without affecting the stock’s price. During periods of high buying or selling pressure, you may also have a hard time transacting. Think of it as a crowd rushing toward a doorway. Those first to the door will have little problem getting through. Those who aren’t first to the door can find themselves waiting while prices move against them, particularly if the doorway becomes jammed with others trying to get through.

There is a range where volume is low, but not too low to invest in. Where the breakpoint exists depends on how much money is being invested. The breakpoint is much higher for institutional investors (mutual funds, pensions, endowments, etc.) than it is for us individual investors. This is due to the economies of scale and capacity restraints that the money managers employed by institutional investors have to cope with. Money managers require a certain level of assets under management to remain profitable. At the same time, the larger the dollar amount of assets being managed, the more limited the universe of investable stocks becomes. This combination makes micro-cap stocks and even small-company stocks off limits to them and their institutional investor clients. There is simply too much money to invest to even consider these lower-volume stocks.

Individual investors are far less constrained. We can go much further down the volume chain because we have far less money to invest, relatively speaking. This is a huge advantage because it allows us to invest in stocks overlooked by institutional investors and thereby more likely to be mispriced.

How low can you can go? In trying to determine where to draw the line for the new stock strategy I've been developing (which you’ll hear much more about next month), we settled on requiring stocks to average at least $1 million in daily average dollar volume. This is one of the volume requirements we use for our Stock Superstars Report. As you can see from the table above, this number encompasses more than 70% of all exchange-traded stocks. It is a far lower breakpoint than most institutional investors can use, but still high enough to reduce the price impact from many subscribers responding simultaneously to an addition or deletion alert.

Those of you selecting stocks by yourselves can go even lower down the volume chain. AAII founder and chairman James Cloonan has suggested individual investors can go as low as requiring just average daily dollar volume of at least 10 times their desired position size. If you want to allocate, say, $5,000 to a stock, you should require potential candidates to average at least $50,000 per day in trading volume. The 10 times rule is a guide; adjust it if doing so gives you more comfort.

• The Liquidity Style: Finding Bargains by Seeking Less Popular Stocks – Yale professor Roger Ibbotson made the argument for investing in lower volume stocks in this 2013 AAII Journal article.
• The Many Ways to Place a Buy or Sell Order – A carefully placed limited order and some patience can get you a better execution price on a low-volume stock. This article explains how limit orders differ from market orders.

• The Individual Investor’s Guide to Personal Tax Planning 2017 – Our annual tax guide has the information you need to start your year-end tax planning and begin planning for 2018.
• The Effect of Dividend Changes on Expected Cash Flows – Rising dividends are often followed by a reduced variance in cash flows over the next five years.

Hanukkah starts on Tuesday evening. To those of you celebrating the festival of lights, may your dreidel land on gimel.

Only three S&P 500 companies are on the earnings calendar: Adobe Systems Inc. (ADBE), Costco Wholesale Corp. (COST) and Oracle Corp. (ORCL). All three will announce their results on Thursday.

The Federal Open Market Committee (FOMC) will hold its last meeting of the year starting on Tuesday. The CME Group’s FedWatch Tool shows the futures market pricing in a 90% chance of a quarter-point rate hike. The meeting announcement and updated committee member forecasts will be released on Wednesday at 2:00 p.m. ET. Janet Yellen will hold what will probably be her last press conference as Fed chair at 2:30 p.m. ET.

The week’s first economic report will be the October JOLTS report, released on Monday. Tuesday will feature the November Producer Price Index (PPI). The November Consumer Price Index (CPI) will be released on Wednesday. On Thursday, November retail sales, November import and export prices and October business inventories will be released. The December Empire State Manufacturing Survey and November industrial production will be released on Friday.

The Treasury Department will auction $24 billion of three-year notes and $20 billion of 10-year notes on Monday and $12 billion of 30-year bonds on Tuesday.

In a milestone for cryptocurrencies, the CBOE will begin trading bitcoin futures on Monday. Just remember two longstanding axioms: 1) Just because you can trade something doesn’t mean you should, and 2) The market can stay irrational far longer than you can stay solvent.

The percentage of individual investors describing their six-month outlook for stocks as “neutral” is at a five-week low. The latest AAII Sentiment Survey also shows increases in both optimism and pessimism.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 0.9 percentage points to 36.9%. Even with the increase, optimism remains below its historical average of 38.5% for a fourth consecutive week. Year to date, optimism has been below its historical average on 40 out of 49 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 3.5 percentage points to 28.9%. Neutral sentiment was last lower on November 1, 2017 (26.4%). The historical average is 31.0%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 2.6 percentage points to 34.2%. Pessimism is above its historical average of 30.5% for the third time in four weeks.

Our surveys of individual investors show that most are not currently making investment decisions based on the pending tax legislation. While some of our members are optimistic about the prospects of tax reform being passed, about 40% of those polled in a different weekly AAII survey said the proposed legislation could hurt them. Most of the recent calls into our office about the legislation have pertained to the proposal requiring the use of first-in, first-out accounting for calculating capital gains on sales of stocks. All of those calls have been against the clause included in the Senate’s version of the Tax Cuts and Jobs Act.

While this year’s highs for the major U.S. stock indexes reaching into record territory has encouraged some individual investors, many others have expressed concerns about the possibility of a pullback or a more severe drop occurring. Also affecting investor sentiment are earnings growth, economic growth, valuations and the lack of volatility. Washington politics remain at the forefront of many individual investors’ minds.

This week’s special question asked AAII members what they thought about Jerome Powell being nominated to serve as the next Federal Reserve Chair. Responses were mixed. More than a third of all respondents (37%) approve of the nomination. They like Powell’s background and/or think he’ll maintain stability in monetary policy. Slightly more than 15% described the selection as being “more of the same.” Nearly 8% have a neutral opinion, 6% oppose Powell’s nomination and 19% say they have yet to form an opinion. Five respondents simply said they wanted current chair Janet Yellen to keep her post, while two others said they wanted John Taylor to be nominated instead.

Here is a sampling of the responses:

• “Great choice. Smart. Should continue a disciplined agenda and not rock the boat too hard.”
• “I would have preferred Janet Yellen stay in the job. However, Powell should be better than some of the other supposed candidates.”
• “From my news accounts, he is qualified and we will expect little change in policies.”
• “I don’t know his record well enough to have an opinion.”
• “No impact. More of the same.”

Bullish: 36.9%, up 0.9 points
Neutral: 28.9%, down 3.5 points
Bearish: 34.2%, up 2.6 points


Bullish: 38.5%
Neutral: 31.0%
Bearish: 30.5%

Individual investors’ cash allocations fell last month to a level not seen in 18 years. At the same time, the November AAII Asset Allocation shows a rebound in both equity and fixed-income allocations.

Stock and stock fund allocations rebounded by 0.6 percentage points to 68.6%. Equity allocations were last higher in June 2017 (68.8%). November was the 56th consecutive month that equity allocations were above their historical average of 60.5%.

Bond and bond fund allocations rose 0.7 percentage points to 17.6%. This is the largest allocation to fixed-income since April 2017 (18.0%). The historical average is 16.0%.

Cash allocations fell 1.2 percentage points to 13.9%. Cash allocations were last lower in December 1999 (12.0%). November was the 72nd consecutive month that cash allocations were below their historical average of 23.5%.

Cash allocations have been mostly lower this year than they were last year. Year to date, cash allocations have averaged 16.0% versus 18.5% for all of 2016.

The reduction in cash allocations is occurring as equity allocations are higher. Last month marked the first time that equity stock and stock funds allocations have equaled or exceeded 68.0% in three consecutive months since September 2000.

The record highs realized by the indexes have boosted the value of stock holdings. Optimism about the short-term direction of the stock market has not soared in response, however. Rather, bullish sentiment mostly stayed below its historical average throughout November, according to our weekly AAII Sentiment Survey.

Last month’s special question asked AAII members how discussions about tax reform were impacting their portfolio decisions. More than 86% of respondents said tax reform was so far having limited or no impact on their decisions. Many respondents said they are waiting to see if tax reform legislation gets passed and, if it is passed, what changes to the tax code are made. About 5% of respondents said they are delaying making changes or are otherwise hesitant to make changes until they know how the bill will impact them.

Here is a sampling of the responses:

• “None, as I expect a lot of haggling and it may fall apart.”
• “Congress has much to do before I start making decisions regarding tax liability strategies.”
• “I have delayed some investment decisions pending the outcome of the tax revisions in the works.”
• “I’m waiting until the final passage of the bill before making any decision on potential portfolio adjustments.”
• “Not at all. I’ll react or have an opinion when Congress actually does something.”

• Stocks and stock funds: 68.6%, up 0.6 percentage points
• Bonds and bond funds: 17.6%, up 0.7 percentage points
• Cash: 13.9%, down 1.2 percentage points

• Stocks: 29.0%, down 1.7 percentage points
• Stock Funds: 39.5%, up 2.3 percentage points
• Bonds: 3.9%, up 0.9 down percentage points
• Bond Funds: 13.7%, down 0.2 percentage points

Take the Asset Allocation Survey.

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