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Wringing Out The
Speculators November 8, 2008
There is one aspect of market behavior that does not change - when times are very good, and have been for awhile, it breeds excessive speculation.
We saw that with stocks leading up to 2000, housing leading up to 2006, and commodities leading up to 2007. Those are just a few, but the point is that one extreme usually leads to the other; when speculation gets out of hand and those folks get burned, they tend to retreat in a major way.
The latest data related to "pink sheet" stocks bears this out. The "pink sheet" is another name for the over-the-counter market, a marketplace of several thousand stocks, usually priced under $1, for firms that do not meet the minimum listing requirements of the Nasdaq or other major exchanges.
Because these stocks can act like low-priced options, or lottery tickets if you prefer, we often see a surge in volume when the market has been doing well. Even a $0.10 move can reap enormous gains if the stock was only trading at $0.05 to begin with.
The chart below shows total dollar volume in these pink sheet stocks since 1995. In order to provide some frame of reference, the volume is expressed as a percentage of total Nasdaq dollar volume. Therefore, when we see a high reading in the indicator, it means that speculation is extreme - folks are trading these lottery tickets at an increased pace relative to the "safe" companies that are listed on the Nasdaq.
The bubble in 2000 is very clear on the chart. Total dollar volume in the lottery tickets reached 3.5% of total Nasdaq volume in February of that year.
We haven't seen anything remotely like that since, so let's zoom in on the post-bubble years to get a better feel for recent extremes:
A few times over the past five years, we saw traders turning over these pink sheet stocks to a relatively high degree, though it was hard to know in advance what constituted an "extreme" because it was no comparison to what we saw in 2000.
Currently, though, we are clearly at the opposite end of the spectrum. In October, total dollar volume in over-the-counter stocks fell to less than 0.07% of total Nasdaq dollar volume, the first time it has dropped below 0.1% since the inception of the data in 1995.
That is 32% less than the previous record low in July 2002. There were a total of three months when the percentage approached 0.1% - April 2001, September 2001 and July 2002. None of them corresponded with the end of the bear market, but the Nasdaq did manage a bounce in the following month(s) each time.
In order to have some optimism that we're near another bear-market bottom, temporary or otherwise, we need to see some give-up among the most contrary of all traders - speculators. From the trading in pink sheet stocks, it's safe to say we've seen that. Home | Commentary | Indicators | Models | Sectors | COT | Subscribe | About Us
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