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The last time I touched on the odd lot data, it was in neutral territory. But in only a week, it has spiked to an extreme which has historically been very bullish.
Odd lots are transactions in the stock market which are for less than 100 shares. Since this size of transaction is characterized by retail and small traders or investors who are uninformed about the market, it is considered a contrarian indicator. So the more odd lot purchases are made, the more we would expect the market to be topping and the less purchases, the more probability of a meaningful bottom in stock prices.
We can actually gauge the involvement of retail (or “dumb money”) participants in the market by looking at not only odd lot purchases but also odd lot short sales. They should present mirror opposites of each other and usually do.
Odd lot indicators are very fast moving though, so we are looking for a short term bounce here. They are not indicative of a intermediate or long term bottom, unless they come in a herd (rather than a single spike).
That’s what happened recently. In late February to mid March 2007 the odd lot purchases spiked 5 times to bullish extremes. The amateur investors and traders wanted no part of this market (on the long side). No wonder then that we had a significant market bottom form.
The same situation played out in the odd lot short sales where during the same time period there were 4 spikes into extreme bullish levels. Amateurs were falling over themselves trying to short the market (profit from a fall in prices).
Right now though, we have just had one penetration from both odd lot purchases and odd lot short sales into bullish territory. To me that is commensurate with a kick higher going forward - we already saw the beginning of a rally from today’s strong close when the market ended at the day’s high.
Unless we see several spikes in odd lot data, I would only look for a short term but lively rally. Stay tuned for more spikes! And if you know any amateurs out there, inquire politely whether they are buying or selling.
And when they ask why you ask, be polite and say, “Oh, just making conversation.”
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