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Odd (lot) Behavior


All the little guys are on MY side?

While there are not many truisms in the market, one that has persisted over the decades is that small, amateur traders tend to be wrong in the aggregate. Whether it is due to misinformation, inability to control emotion, or what have you, small traders have the deck stacked against them and more often than not it pays to watch them and do the exact opposite of what they are doing.

I monitor small-trader speculative activity many different ways, but one that I had put on the back burner until only very recently is odd lot trades. An "odd lot" is a trade for fewer than 100 shares, and due to the low dollar amount of the trades (unless it's something like Berkshire Hathaway!), and typically bad fills, odd lot traders are believed to be among the smallest and least informed of all traders. Therefore, when many of them seem to form the same opinion, it normally behooves us to look the other way.

This is an issue now because over the past 5 days, odd lot traders have sold short (i.e. they borrowed stock and sold it, hoping to buy it back later at a lower price and a profit) more than 1.5 million shares daily of NYSE companies. That is not a lot when you consider the size of the market, but it is a lot for these traders - in fact, it is the highest 5-day average in their history. The chart below shows how the market performed after other times these odd lot short sales spiked to an extremely high level.

There is nothing inherent about this data that means the market needs to head higher. Even if all these traders cover all these shorts at the same moment, the market wouldn't even blip. But this data can be a reasonable proxy for small-trader sentiment, and right now it suggests that those who tend to be most wrong at market turning points are extremely pessimistic about higher prices. That makes me want to be bullish, though many of the other measures I track are not confirming this. Depending on how much weight you want to put on data like this, it seems as though the market could be etching out a tradable low sometime soon.
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