by Jason Bodner
December 13, 2022
Have you ever envisioned looking down at yourself from above to see where you are standing?
Well, if you did that on Vulcan Point Island in the Philippines, you might get dizzy. That’s because this tourist attraction is an island in a lake in an island in a lake in an island within a chain of islands.
You would never know you’re in a Russian doll of topography when standing on Vulcan Point Island.
Similarly, looking at stock prices alone can be like being dropped blindfolded on Vulcan Point Island.
Last week was a perfect example.
In the previous week, November 30th was a huge buying day. Markets were up gleefully after Jerome Powell telegraphed language hinting that rate hikes might slow down after this week’s FOMC meeting.
But that was then. Now (as I write) is Friday, December 9th. Since November 30, the SPY and QQQ (the ETFs that track the S&P 500 and NASDAQ) have dropped -3.53% and -3.86%, respectively.
It’s price action like this that sells a lot of Tums.
But if we reorient our perspective to include more information than index prices alone, we might emerge with a different view, maybe one that doesn’t give us so much heartburn.
Volume is an integral component of market analysis, but it doesn’t get much attention in most analyses I see, certainly not on news outlets like CNBC. Most of the week, I watched the markets pre-opening data firmly in the red. The seriousness and anxiety in commentator voices were palpable. Things are not good.
But that level of anxiety is calculated to keep viewers engaged, so they can watch an ad from one of the network’s generous sponsors. Sometimes if the real (calmer) story were told, viewers wouldn’t care as much, and they’d tune out. No ads would be seen. Sponsors would stop paying, and the model breaks.
So, it’s better to keep viewers nervous.
My view is far less nervous due to a simple reorientation of factual analysis.
Simply looking at price data can be confusing. For example, here is last week’s QQQ data from Yahoo:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That’s a lot of numbers. And the volume is not that helpful without a yardstick to measure each number.
How about we start with the 25-day average volume? Then, instead of all these prices, we’ll just look at day-to-day returns. Then let’s flag the days on which volume was higher than average.
Let’s look at that same QQQ table again but reoriented from above – like our island in a lake etc.:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As it turns out, the only day with higher-than-average volume was the big up day, November 30.
Ahhh…. that’s better now, isn’t it? Right away we can see the big up day was above average volume: An important signal, because buying was big. More important because the selling since then was not big!
Now, let’s look back since October for both SPY and QQQ, but only look at above-average volume days:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now it snaps into focus: You’re on an island in a lake on an island in a lake on an island! On both index trackers, there are more up than down days on high volume: 8 of 13 for SPY, and 9 of 14 for QQQ.
Put another way: Down days on low volume aren’t necessarily a big cause for concern. Instead focus on the big volume days and what they tell us. They tell us: Prices are usually rising on days of big volume.
We can visualize this in the stock market another way. My research focuses on understanding unusual volumes. I look for big institutional money flowing in and out of stocks in non-unusual ways. Let’s look at that big November 30th day through another lens. Here we see a 3-month chart of SPY with just prices:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We see a V-shaped market since mid-September. Now let’s reorient and add cumulative unusual buying in the form of the vertical light blue bars:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We can see quite nicely that days of increased unusual buying pushed the index higher.
If we add another layer, we now can see cumulative unusual selling of stocks too (red lines):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The picture becomes clearer still. Huge selling days pressure markets lower. But we also see low selling days (even when market prices fall) don’t mean nearly much as high selling days. Now let’s look at a 1-year chart of SPY (price alone, and price with unusual buying and selling). It should snap right into focus:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now that we have a better view of price action, let’s return to the cruddy week just past. If we dice up the unusual buying and selling by market capitalization, we can see where the action was concentrated:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
On the surface, last week saw some selling (red), but it’s important to contextualize volume, which was light, with the prior week’s huge volume, which saw immense buying.
Look at what happens when we add the two weeks together:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Now, the selling doesn’t look so bad, does it?
Now we know that a price-only view of the stock-world doesn’t really tell us the whole story.
If we look at November 30th in terms of individual stocks, ranked strongest to weakest in terms of fundamentals and technical, we find that among the top five buys that day, two were in the Consumer Staples sector and one each in Financials, Health care and Technology, typically growth sectors.
In conclusion, looking at a price chart and watching CNBC only shows you part of the picture.
Hellen Keller put it best: “The only thing worse than being blind is having sight but no vision.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Inflation is Clearly Cooling Off – Hopefully the Fed Notices
Income Mail by Bryan Perry
Identifying Year-End Winners to Lead us into 2023
Growth Mail by Gary Alexander
A Pro-Growth Agenda for the 118th Congress
Global Mail by Ivan Martchev
Gold Has Already Started to Run
Sector Spotlight by Jason Bodner
Look at Volume When Evaluating a Stock’s (or Market’s) Big Move
View Full Archive
Read Past Issues Here
Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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