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A very old indicator that measures the magnitude of speculation on Wall St. is the volume ratio between the NYSE and the OTC market. This ratio hearkens from the early days when Nasdaq was the over the counter market where smaller and riskier securities traded.
This was before the time of Microsoft (MSFT) and Intel (INTC) - bellwethers of both the stock market and the US economy. Today it would be more apt to substitute the Pink Sheets OTC BB market instead.
Even so, for some reason the volume ratio still holds and has flagged important market tops. Including the start of the bear market in October 2007.
There is no absolute level however in this ratio that can give us oversold and overbought readings. As with all analysis of volume, we have to contend with not only a seasonal pattern, but also a continuous increase of trading over time. Since we are looking at a ratio, most of the upward creep in volume should be canceled out.
Right now, the volume ratio is extremely high and points to a lot of froth in the market. We’ve seen other signs of this in the sentiment data as well.
To play devil’s advocate, the ratio could be higher because of the Nasdaq’s leadership (it has rallied much more than the NYSE since March 2009).
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