Chart:  Over The Counter Share Volume

The big theme among our indicators over the past few weeks has been a rapid abandonment of speculative activity by traders and investors.  We haven't seen too much outright pessimism or bets against the market, but we certainly have seen a big pullback in bullish bets.

The most speculative segments of the markets available to retail traders are options and penny stocks.  Trading in the latter group continues to weaken, as traders leave these "lottery ticket" stocks alone.

In May, 15.1 billion shares traded over-the-counter.  That sounds like a lot, but compared to the past 8 years, it's the 3rd-lowest amount of volume (only September 2004 and November 2008 were lower).  Volume is down nearly 50% from where it was last June, also among the lowest year-over-year changes we've seen.

When we look at penny stock volume as a percentage of total Nasdaq Composite volume, we can get a sense of the relative amount of speculation in the market.

We took a look at this in February, and saw that it was off the charts - traders were clamoring for the most speculative stocks they could find.

That is clearly no longer the case.

In February, OTC volume was 400% greater than Nasdaq Composite volume.  It has steadily eroded since then, and as of May tallied 127%.

Since late 2003, there have only been three times the ratio dipped below 100% - September 2004, June 2006 and October 2008, all of which occurred near lows in the Nasdaq.  We're not quite there yet, but getting very close.

Study:  Can Stocks Bottom Without A Spike In The VIX?

One of the major questions I've seen lately deals with the VIX.  The "fear gauge" has not moved much at during during the recent correction, which is indeed strange.

Part of the reason is because traders price implied future volatility on past historical volatility.  And this decline has been pretty orderly, so right now the two aren't very far out of whack.  Also, we're entering the summer doldrums, when trading volumes tend to recede and volatility can remain subdued.

Anyway, as of Tuesday the S&P had dropped more than 4% to a one-month low, while the VIX actually declined as well during that time.

So can the market form any kind of meaningful bottom without a spike in the VIX?

It can, and it has.

The table below shows every time since 1986 that the S&P 500 dropped down to at least a one-month low, losing at least -4% during the past month.  During that same time, the VIX also declined...there was absolutely no spike in the "fear gauge" during the correction.

This was not a sign of too much complacency in the market.  Or if it was, it didn't matter.

A month later, the S&P 500 sported a positive return 7 out of 8 times, averaging a healthy +6.1%.  Only twice did the maximum drawdown during the month exceed -5%, while six times the maximum gain exceeded +5%.

Overall, the lack of "spikiness" in the VIX lately doesn't seem like a concern - it seems more like a bullish signal.