ODD LOT PURCHASE PERCENTAGE

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APPLICABLE TIME FRAME(S):  

SHORT

 

UPDATE SCHEDULE:

Daily

 

REPORTING DELAYS:

One day

 

RECENT STUDIES:

07/31/12......Odd Lot Trades Have Skewed Towards Sell Orders

 

EXPLANATION:

An “odd lot” is defined as any trade for fewer than 100 shares of stock. 

 

Since an odd lot order has a tendency to get a bad fill (not to mention the low dollar amount it takes to buy fewer than 100 shares of most stocks), these kinds of orders are normally considered to be from small, amateur traders.  And as we’ve seen with many of our indicators which track this population, we know that when many of them are leaning the same way, the market tends to go the exact opposite direction. 

 

This indicator tracks the amount of odd lot volume that is made up of purchases as opposed to sales:

 

Odd Lot Purchase Percentage = Purchases / (Purchases + Sales)

 

While this data was quite effective in the past, changed market dynamics seemed to have forced it to go the way of the dinosaurs.  Most likely, these traders migrated towards the options markets, and more recently the e-mini futures contracts. 

 

The chart below shows how odd lot volume, as a percentage of total NYSE volume, dropped off precipitously beginning in the late 1970’s.

 

 

The CBOE began trading options in 1973, with put options beginning trading in 1977, so it’s no real surprise that odd lot volume dropped off so dramatically after those markets came online.  Odd lot volume regularly accounted for 5% to 10% or more of total NYSE volume prior to 1977.  After 1977, it rarely reached more than 2%, and now it usually makes up only about 1%.

 

Even though these traders have many other alternative trading vehicles now, every once in a while we will see a spike in odd lot volume.  For example, it consistently stayed about double its previous norm from June 2002 through April 2003 as the market struggled to find a bottom.

 

The data as shown is a 10-day moving average of the percentage of odd lot volume that is made up by purchases.

 

GUIDELINES:

When purchases make up a high amount of total volume (more than 55%), we can be relatively assured that these traders are bullish on the market.  From a contrary point of view, that tends to be a bad sign for the market, as it normally declines after such egregious displays of confidence from this type of trader. 

 

On the other hand, when sales overwhelm purchases (e.g. when purchases regularly make up less than 45% of total volume), then these traders are apparently quite pessimistic on the market's chances of rising, yet that's usually just what the broader market does.

 


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