Trader’s Narrative

Measuring the volume ratio of the Nasdaq and the NYSE goes back to the early days of technical analysis.

At its genesis, the Nasdaq was seen as a lesser exchange where smaller, younger and riskier companies who had yet to prove themselves got listed. The NYSE on the other hand was where these companies all wanted to be one day… if they met the listing requirements.

Advancements in technology have made such impressions anachronisms as the Nasdaq has become the “big board” for innovative companies in software, hardware and biotech.

While the image of the Nasdaq as a lesser stock exchange may been lost, the merit of comparing the two exchanges volume remains.

As you can see, during times of great market stress; when fear and loathing has gripped everyone’s imagination, the ratio is lopsided with the Nasdaq having relatively little trading compared to the NYSE. The end of 2002 and the first few months of 2003 are a good example:

The logical explanation offered is that people gravitate towards the NYSE in times of heightened risk because it contains well established companies.

The latest spike low - reaching almost parity - came on March 20th, 2008, which surprisingly was after the sharp declines. While a spike low is intriguing, it is not the same as a resetting of the volume ratio to a lower handle.

But then again, that would dovetail with the theory that what we are seeing is not a bear market bottom or a bear market at all but rather a very brutal correction within a cyclical bull market.

The previous time I mentioned the Nasdaq to NYSE volume ratio, it had just signalled (correctly) that October 2007 brought with it a very high probability of a top.