For just about all of 2012, liquidity in stocks, options, commodities, ForX, are down substancially vs 2011. There is thinking that Dodd/Frank and other legislation are catalysts for this shrinking liquidity. That being the case, it begs the question, with much lower liquidity will that lead to much lower stock prices over time as:
1)Less money is in the market
2)Less liquidity, in general, always has led to liquidity discounts
I'm getting to be a believer. So, what will increase liquidity or decrease liquidity? Clearly the "leadership" out of Washington is decreasing liquidity. Also, falling earnings estimates will decrease liquidity. For now, all I can see for an increase in liquidity would be "greed". But there just isn't any reason to get greedy. So, for me, any moves higher in the market will be met by taking gains-until a point when stocks get "stupid cheap" and/or earnings estimates start going up.
In a nutshell, volume precedes price. Until volume is consistently higher by 20% y/y and/or there is a selling climax with huge volume-I'm a net seller. I'm concerned, I could be a net seller until the 2ndH of 2013.