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continued from previous column
Oddly Enough, Odd Lot Traders =
Smart Money
Odd Lot trading describes those trades executed on
the NYSE for fewer than 100 shares at a time. Generally, these are from
the smallest traders in the market.
In October 2010, the NYSE changed the way it
releases Odd Lot trading data. It's not clear how or why they changed the
data, but it was drastically different from what they had released in prior
years.
Prior to that October, Odd Lot data was an
inconsistent indicator, but could be considered a better contrary indicator than
not. In other words, when these small orders were skewed to the buy side,
it typically coincided with a market top. When these small orders were
mostly sells, it indicated extreme pessimism and usually a market bottom.
After the NYSE changed its calculation, the
interpretation of the indicator changed as well. It doesn't work as a
contrary indicator, but seems to have promise as a non-contrary one.
It feels weird to suggest this, but the Odd Lot
traders have been the smart money.
A possible reason is the proliferation of
algorithmic trading, where funds break up their orders into tiny bits to confuse
other market participants and disguise their trading strategies.
Whatever the reason, the chart below shows the Odd
Lot Purchase Percentage since the change in October 2010. The indicator
calculates what percentage of total orders are buy orders. The higher the
blue line, the more these small trades are made up of buy orders.
Click chart for larger view
We can see that currently, the Percentage in on
the lower end of its range, meaning these small orders have been skewed towards
sells instead of buys.
That would suggest these traders are cautious on
the market, and of the six other times it's been this low,
stocks dipped afterward four times. The exceptions were in the momentum
market of late 2010.
