Chart:  Over The Counter Volume

The latest figures from the Nasdaq exchange shows that traders in the most-speculative part of the market, Over-The-Counter issues, picked up their pace of activity.  These lottery-ticket stocks, also known as Pink Sheets or penny stocks, usually don't meet the minimum requirements to list on a major exchange.

When we see activity in these issues perk up, it's almost always after the broader equity market has done well, and vice-versa.

The number of OTC shares traded in January increased 13% from December's levels, and 44% from last January.

At the same time, volume in stocks in the Nasdaq Composite index increased only 6% in January from December's levels, and actually decreased 20% from last January (using Bloomberg data).

With that increase in OTC volume, and decrease in Composite volume, the former as a % of the latter just hit a new all-time record high.

In October 2008, OTC volume made up only 73% of Nasdaq Composite volume, but by last month that jumped to 391%.

The previous record was 386% in March 2006, right before the Composite lost more than 10% over the next four months.

It seems odd that speculative activity compared to the more staid Composite would be higher now than in 2000, but there was a big ramp up in OTC volume beginning in the fall of 2003, and has never really ebbed too much since then except for during the depths of the 2008 crisis.

Chart:  NYSE Advance/Decline Line vs. The S&P

One of the main bullish arguments from technicians is that the advance/decline line on the NYSE continues to hit new highs.  Not just one-year highs, but all-time highs.

Just as a quick refresher, the advance/decline line is calculated by starting with an arbitrary figure from long ago, then each day adding the net number of advancing versus declining stocks on the NYSE.

When the S&P hit at least a one-year high and the advance/decline line at least a five-year high, over the next six months the S&P showed a positive return 77% of the time, with a median gain of +6.5%, so perhaps the bulls have something there.

It's maximum gain during the next six months averaged +9.6%.  But it wasn't without some harrowing cases, too, as the average maximum loss was -4.2%.

Risk-wise, 13% of the days showed a correction of at least -10% sometime during the next six months.  That seems high, but it was less than the at-any-time probability of 23% of seeing a 10% correction.

Let's go back and look at major stock market peaks and see if we usually saw a divergence between the S&P 500 and the a/d line.  For this purpose, a "major peak" is defined as the highest S&P 500 price for at least six months before and after that date, with at least a 10% correction during the next six months.

It turns out that, yes, we do usually see cumulative breadth start to wane before the market tops out.  Since 1955, 13 out of the 15 peaks saw breadth top out before the S&P 500 did.

On average, breadth peaked 64 days before the S&P did, but that's a little misleading.  It only measures the highest A/D line reading during the past six months, so it's possible breadth peaked well before in some of these instances (such as in 2000).

Bottom line, the bulls do have a case that the probability is low of a major, >10% correction during the next six months, and that will be the case as long as both stocks and the A/D line hit continual new highs without a divergence.