Stocks’ Speculative Ghost Town

Sometimes, people just don’t care.

Despite a massive October rally in stocks, speculative penny stock traders actually reduced their trading activity last month, from what had already been very low levels.

Share volume, dollar volume and transaction volume are all dragging along at or near decade lows.

Why might this matter?  Over The Counter (OTC) stocks are the market’s Wild West.  Filled with penny stocks that are more akin to lottery tickets than anything, the ebb and flow of volume in these stocks highlight the speculative appetite of traders.

When penny stock volume is very high, it tends to precede market peaks; when volume is very low, it tends to precede troughs. 

The only other times in recent history that volume has been this depressed were near the prior two bear market lows in the falls of 2002 and 2008.

A Historic Arms Index

The lopsided selling pressure today is taking on historic proportions in some senses.

We have another 50 minutes or so until the close, so things could change significantly, especially with noisy indicators.  But one of the most notable extremes so far today is in the Arms Index (better known as the TRIN).

Today’s preliminary reading is 6.46, according to Bloomberg.  If that sticks into the close, it will be only the 3rd time in the past 20 years we’ve seen such a one-day extreme.

Recall that the Arms Index measures the amount of volume in declining stocks versus volume in advancing stocks, so a very high number means selling volume is exceptionally lopsided.

The table below shows the S&P 500’s performance following other readings above 6 since 1950.  The index was positive a month later every time.

In the full report for subscribers, we highlight more scenarios depending on what the market does going into the close.

VIX Double Jumps

With the daily uncertainty of the headlines coming out of Europe, traders are paying up for portfolio protection.

The VIX “fear gauge” jumped more than 20% on Monday, which almost always leads to a short-term bounce.  We’re obviously not getting that today.  The indicator is now on track to rise more than 15% for two consecutive sessions.

That’s unusual, and usually leads to a bounce in stocks:

Gaps After A Monday Holiday

Traders are looking pretty optimistic this morning, showing a gap of nearly +1% in the S&P from Friday’s close.

Here’s how the S&P 500 tracking fund, SPY, performed from open to close on the Tuesday after a Monday holiday, when the open was at least +0.5% from the previous day’s close.

Note that only 4 of the 14 instances managed to gain throughout the day.  From Tuesday’s close through the rest of the week, though, results were decidedly more positive.

Starbucks vs. Coffee vs. Gas

This morning on Twitter, Kevin Depew (@kevindepew) highlighted the rising costs of coffee and gasoline (via http://is.gd/x0Ma5C).

Both have risen dramatically, and one would think that would have an adverse impact on the sentiment of the person who has to drive to get their coffee.  Like anyone going to Starbucks.

Doesn’t seem to be the case, though, at least not yet.

The chart below shows trading over the past three years between Starbucks and the two commodities.  Howard Schultz of Starbucks has called the coffee rally ludicrous and destined to fall apart…but based on the past few years, the coffee (and gas) rally hasn’t hurt the stock one bit.

Google, Open Table and LinkedIn IPO Performance

With LinkedIn (LNKD) opening today, let’s go back to the two other major tech IPOs in recent years that most are referring to.

Here’s how GOOG performed in the months after it opened:

And now Open Table:

Both were down a month after their openings, then began their ascent.  Something to keep in mind in the coming weeks with LNKD.

Dollar Rallies

Bear market bounces…when the US Dollar jumps 1.25% or more from near a 52-week low, next day positive only 33% of the time.