ODD LOT SHORT SALES
APPLICABLE TIME FRAME(S):
SHORT TO INTERMEDIATE
UPDATE SCHEDULE:
Daily
REPORTING DELAYS:
None
EXPLANATION:
An “odd lot” is defined as any trade for fewer than 100 shares of stock. A "short sale" is transacted when one borrows stock from a brokerage, then sells it, hoping to buy it back later at a lower price and a profit. If one sells stock short, and the stock rises, losses can mount quickly and are theoretically unlimited. As such, it is considered a risky investment strategy.
This odd lot short sale indicator, then, tracks very small, speculative trades taken against the market.
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.
It is possible that some, perhaps even most, of this volume could be made up of professional traders using odd lot orders to skirt regulatory restrictions, the bottom line is still the same - when odd lot short sales spike higher, the market normally bottoms.
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 5-day moving average of total odd lot short sales, in millions of shares.
GUIDELINES:
Exceedingly high short sales over a prolonged period of time (3 to 5 days or more) is a good sign that these traders are betting aggressively on declining prices. In true contrary fashion, however, the market normally does the exact opposite.
On the other hand, when short sales dry up, the market is more likely to decline than rise substantially.
To define these extremes, the chart uses three-month Bollinger Bands.
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