Saturday, April 07, 2007

NASDAQ Volume As A Sentiment Measure

What does it mean when NASDAQ volume greatly exceeds volume on the New York Stock Exchange? One interpretation is that the more growth oriented, volatile NASDAQ stocks are attracting enhanced interest relative to established blue chip, value-oriented companies. That would be a sign of enhanced speculative sentiment. On the other hand, when NASDAQ volume drops relative to NYSE volume, traders and investors might be shunning these growth-oriented stocks. That might provide us with a sign of risk-aversion. In my last post, we found that risk aversion, reflected in patterns of last hour trading, was associated with superior stock market returns going forward. Does this pattern hold true for the ratio of NASDAQ to NYSE volume as well?

Going back to 2004 (N = 165 trading weeks), we have 82 occasions in which the weekly NASDAQ volume was more than 20% greater than the NYSE volume and 83 occasions in which NASDAQ volume was below this level. When weekly NASDAQ volume has been relatively high compared with NYSE volume, the next five weeks in the S&P 500 Index (SPY) have averaged a gain of only .09% (45 up, 37 down).

Conversely, when NASDAQ volume has been relatively low compared with NYSE volume, the next five weeks in SPY have averaged an impressive gain of 1.32% (57 up, 26 down).

What this tells us is that, when weekly speculative sentiment is high, returns over the next five weeks has been subnormal. When we have signs of low speculative sentiment (risk aversion), returns over the next five weeks have been superior. This mirrors my earlier findings with the separate put and call volume data, as well as with the joined options data and relative options ratios.

At present, NASDAQ volume has been running above average relative to NYSE volume in the wake of the bounce from recent lows--about 33% higher than NYSE volume. Let's see if that constrains gains going forward.

3 comments:

AnaTrader said...

Brett
Your quote:
when weekly speculative sentiment is high, returns over the next five weeks has been subnormal. When we have signs of low speculative sentiment (risk aversion), returns over the next five weeks have been superior. Unquote

Did not realize this reading on NASDAQ; although I am aware of the Russell 2000, which is a leading indicator.

Thanks for this revelation.

Jon said...

Hi Brett:

Very much enjoy your insight. Thank you.

Following the NDX volume and we are having significant divergence vs the NYA & GSPC volume, which
remains steady over the similar periods mentioned below ....

NDX

Av 1 min vol-
Last 365 days 2000K
Last 30 days 1800K
Last 7 days 1600K

Av 1 day vol-
Last 365 days 800K
Last 30 days 715K
Last 7 days 625K

The air is going out of this bag.
Comments?

Jon

Brett Steenbarger, Ph.D. said...

Hi Jon,

Great observation. It's when price highs or lows no longer attract interest--a la Market Profile--that we tend to see returns to a prior value area.

Brett