Friday, July 3, 2009

Nasdaq -Nyse Volume

On around June 10th, i had an email discussion with a former colleague who inquired about the market. At the time i mentioned to him the concerns i had regarding what looks like a possible speculative bubble. How do we determine increased speculation? It is not something i can take credit for - but in general, by analyzing the relationship between NYSE and Nasdaq volume, one can get a reasonable read on the amount of speculation. What i have done is used this general approach, but tweaked it a bit to suit my needs. Here is what i sent my friend on that day:

Nasdaq SIGNIFICANTLY lower within next 30 days.

Based on data i am seeing, the above statement i believe will prove to be true.

Today's data showed that overall market volume can be predominately accounted for by nasdaq traders. In fact, if we look at the volume attributed to the nasdaq at today's close, for every one share traded on the NYSE, there were 2 traded on the Nasdaq. There were only 12 similar occurrences in the past 20+ years. 30 days later, the nasdaq was trading higher 6 times and lower 4 times. That doesn't seem to be great odds, but what's notable is the average loss vs wins: -12% vs 6.72%.

Now, if we lower the threshold ratio such that the relationship is .75, things get a little more interesting in that there were a lot more occurrences. Here we find 82 occurrences with the market trading lower 67 times 30 day later(or 82% of the time!), and with an average loss -12.89% of vs 10.15%.

FINALLY, one last tweak. We just had the above described scenario occurr twice in row (two consecutive days). There were 31 such instances in the past, 28 resulting in a lower close 30 days later (or 90% of the time!), with an average loss of -13.67% vs 7.06% for the 3 positive finishes. While the accuracy percentages is pretty darn good,
more interesting to me is the large percentage returns we see.

If i had to summarize this study, it would be...when speculators dominate volume as market move! (nasdaq is home to most speculators, hence when they start dominating volume, it means there are more speculators in the market. Remember what speculators did to oil and how quick it came crashing down?)This is just one study, and although it shows good odds, obviously there is no guarantee that we will see those numbers/returns. I think you still have to be cautious given the power of this move we have seen. If there was ever a time to
defy the odds, now would be it.

I followed this up on July 1st with the following update:

This is still in play. It occurred first on June 5th (near the most recent highs) and still has 12 more trading days to hit the 30 day mark. Currently the market is -1.78% from when it was triggered.

It also occurred again on 6/24, implying more downside 30 days later from that date.

I bring this up once more because it is close to firing yet again! yesterday the ratio was 1.74, today it is 1.84, tomrrow ...? LOTS OF SPECULATION here...thread carefully.


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