The ratio of total Nasdaq volume to total NYSE volume can be used as a decent sentiment indicator for the stock market. It’s not without its problems, however, so one can learn to deal with its quirks.
This week’s chart shows this ratio, smoothed with a 10-day simple moving average to see past the noise in the data. It matches the movements of the Nasdaq composite index quite well. When it rises to a high level, it helps to mark a peak, especially when it comes back down from that high level. And the lows help mark nice price dips. The current level is still quite high, and so the immediate conclusion is that the price decline has not yet worked enough on sentiment to show us a nice bottoming condition for stock prices.
Nasdaq stocks tend to be more speculative, partly because of the easier listing standards there, and partly because of the tradition regarding the types of companies that choose to list there versus the NYSE. So, when traders feel more frisky, they like to trade Nasdaq stocks more, which increases the total volume of this exchange. And when prices have fallen and people retreat into trader hibernation, the total Nasdaq market volume drops against the NYSE. This is all a nice, neat story, and viewing these readings in the context of the recent value range has worked for two and a half years.
This becomes a problem, however, when we look further back in time. There was a big shift that started after the Covid Crash in March 2020 when free money and people trading while working from home increased the volume of low priced stocks. The volume of stocks is not at all the same, and the same amount of money invested in low-priced stocks results in more stocks being traded. This helped push that Nasdaq/NYSE volume ratio up to a new, seemingly permanent range.
This is where the problem lies. If you are going to use this indicator or any indicator to gauge when a “high” or “low” reading is giving us an indication of sentiment, then you must have a way to determine what the “high” and “low” readings mean. “. This is problematic when the data undergoes a huge regime shift and levels that were good markers of an overbought condition are ignored. It’s a big problem. And I don’t know of a good way to know that such a regime shift into “normal” levels is happening the very moment it is happening. After the fact, it’s a much better way to make such decisions, but we don’t start trading that way.
With those caveats out of the way, I still think it’s fair at this time to note that this Nasdaq/NYSE volume ratio is still quite high, which means it’s not a of these juicy opportunities. Not yet. A little more work needs to be done by the market to convince everyone that all hope is lost, that trading penny stocks is a dumb idea (it still is, but people still believe it), and when this has happened, then we may have the opportunity for significant upward movement.