Continued Chop a Good Sign
Thursday, October 21st, 2004 9:10pm EST
Variations on Volume
Bottom Line: A couple of different ways of looking at volume in technology stocks shows that traders have not been trading them very aggressively, something that is normally a positive development.
I’ve stated several times before that I don’t put much faith in volume as an indicator in the traditional sense. When looking at volume for the broader market, breakouts and breakdowns do not seem to perform with any more consistency whether volume is heavy or light. I don’t mean to suggest that watching volume is without merit, since for some individual stocks it is an excellent tell, and for the market in general it can be useful at times.
I am a firm believer that traders tend to flock to the very liquid exchange-traded funds, such as SPY and QQQ, in times of uncertainty. That thought is the basis behind the Liquidity Premiums that we post to the site, which look at ETF volume in comparison to the volume in the underlying stocks. When traders are favoring the ETFs over the individual stocks to an extreme degree, it has coincided with a market low more often than not.
The QQQ Liquidity Premium is now the highest it has been since May, telling us that traders have been shunning individual stocks for the relative safety of the ETF. Also, for only the fifth time this year, volume in QQQ has been over 100,000,00 shares for five days in a row as of today’s close. The previous instances were in mid-March, early and mid-May and mid-July, after each of which QQQ was positive 30 days later.
If we want to look back any further, it becomes a bit more difficult to use an absolute level of volume because it is seasonal and has increased over time. So let’s look at QQQ volume in terms of its 50-day moving average – in that case, over the past five days, it has been at least 10% above its 50-day average every day. That, too, is an unusual circumstance as it is something that has occurred eleven distinct times over the past three years. 20 days later, QQQ was higher eight of the eleven times, with an average return of just over 4%.
So we can see that for the most part, traders have shown more of a preference to trade a technology-related ETF than technology stocks themselves. That also becomes readily apparent when we compare the total volume on the Nasdaq to the total volume on the NYSE.
The chart below shows a 21-day average of the ratio of volume on the Nasdaq to that of the NYSE. When the ratio is below 1, that means that Nasdaq volume has fallen behind that of the NYSE. The green bars highlight those times the ratio reversed up from an extreme.
Currently, the ratio is hovering about .90, meaning that Nasdaq volume has averaged about 90% of that seen on the NYSE over the past month. This is relatively unusual as we can see from the chart – other than a period in late May/early June this year, we’d have to go back to the bottoming process in the Spring of 2003 to see another time traders showed such a preference for listed stocks.
With the assumption that stocks on the Nasdaq are more speculative than those on the NYSE (which isn’t necessarily a safe assumption anymore with the Big Board sporting such classics as FNM and MMC), a low Nasdaq/NYSE volume ratio suggests traders have been pulling in their horns and concentrating more on “quality” equities. With the high-volume blowups we’ve seen over the past month in some large-capitalization, previously respectable stocks, this ratio may be somewhat distorted. Still, it confirms what the Liquidity Premium is saying and if it continues, it would be another sign that traders have become overly pessimistic.
Conclusion
Yesterday in an intraday note I made note of the fact that the Investor’s Intelligence sentiment survey reported its most recent results with a large jump in bullishness. That is something that went completely counter to the lowrisk.com survey I had discussed earlier, and is not what one would want to see if looking for higher market prices. Certainly that kind of bullishness is not unheard of (we have seen 164 weeks since 1969 with more bulls) and has not been particularly bearish when looking out a few months (the S&P was higher nearly 60% of the time), but I don’t think these readings should be dismissed lightly and it warrants at least a little extra caution for those looking to stay on the long side of the market.
I continue to believe the broader market is going through its usual paces in putting in a tradable low. The chop and volatility we have seen over the past week or so is fairly typical, and another probe lower should allow us to see a good low be put in place.
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
Disclosure: no positions
This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.
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