March 3, 2000
I watch Tom Costello on
crow each day about the volume on the
as a parent might brag on and on about his child vs. another's. But I'd like to set the record straight: The Nasdaq is trading on record volume, but it is not twice that of the
Nasdaq volume is computed a little differently than that of the NYSE. Some say it is actually double-counted. However, many studies have shown that it is closer to 50% over-reported. This is due to the way the exchange reports trades; it's different from the NYSE. The NYSE, an auction market, counts each trade once. So if you buy 1000 shares of XYZ on the NYSE, it gets reported as 1000 shares.
However, over on the Nasdaq, as I understand it, if the trade takes place on behalf of a customer, it gets reported once, i.e., 1000 shares of XYZZ is reported as 1000 shares. But if the trade takes place dealer to dealer, it gets reported twice, as each dealer reports the trade, i.e., 1000 shares of XYZZ may be reported as 1000 shares by the buying dealer and 1000 shares by the selling dealer. I admit I don't understand the logic behind this, but that's the way it has been explained to me by many Nasdaq traders.
So the Nasdaq's 2 billion-share days may in fact be only 1.5 billion, which is nothing to shake a stick at, but they are not twice that of the NYSE. In fact, as I post the charts day after day, I've noticed how much higher, on a relative basis, the volume in the NYSE individual stocks is than what we've seen before. Of course, almost all of it is on the downside. On the Nasdaq the volume on the stock charts is not as obvious, as it's often the new issues or chat-room stocks that capture the lion's share.
Unfortunately, I've searched all the computer-generated charts and cannot find one that depicts this well enough to show here, mostly due to the way the computer must recalculate the scale to adjust for the volume. My charts are done in pencil and the scales don't change very often. But let me explain. If I go back to November in the
chart, the volume in this stock did not go over 3 million in the entire month. In December we had maybe three or four days over 3 million. In January, when the stock began its relentless slide from 60, volume of over 3 million shares a day jumped to almost 12 days. And in the month of February another 12 days showed volume over 3 million. Let me reiterate that November and December were "up" months for this stock as it went from 46 to 60.
And it's not just International Paper that shows up like this:
Johnson & Johnson
Procter & Gamble
do too. Most noteworthy is
. Wal-Mart had slid from 70 to 55 without a significant pickup in volume, but notice how the slide from the mid-50s to 43 came on a marked increase in volume. Early on in a major decline investors hold on, thinking this is just a correction, but then they can't stand the losses and finally they dump the stock. That's when the volume picks up in earnest.
What does this all mean? Well, ultimately it turns out to be a positive. Beaten-down stocks cannot recover until the sellers are all done, and this huge increase in volume on the downside tells me the sellers really are dumping. That's how stocks eventually make a bottom: when the selling gets exhausted. I don't think the selling is exhausted yet, but all this downside volume does help move us in the right direction.
Of course, after the dumping, we rarely see the stock turn, reverse and zoom ahead immediately, as it takes a while for investors to believe again. They feel as though they've been burned by the stock, so it's going to take quite a while to warm up to it again. That process is called base building. And on the majority of these stocks we've yet to see a decent successful test of the low, but remember high volume typically comes late in a decline, not early.
Having searched for a stock that has begun to build its base in such a manner, I have only come up with one:
. I caution that it's still early in its base building, as I believe it's only about 60%-70% through. But see the huge volume decline in December? The stock was already down from 80 to 50, had rallied and then -- boom! The sellers came out in full force, causing the volume in this stock to rise from an average 2 million to 3 million shares a day to 6 million to 10 million. See how this stock had an oversold bounce from the low, came down and tested the low -- only this time on less than half the volume? That's the first step in the bottoming process. Now the stock has backed and filled for almost three months and has yet to make a higher high, but we now know that if Best Buy gets through 60, it will have broken out of this two-and-a-half month trading range, and will be on its way to completing the base.
This is an example of how long it will take these old economy stocks, once they start sliding, to show signs of bottoming. That is just one of the reasons I think it's still too early to get a sustainable rally on the NYSE.
Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets on Tuesdays and Fridays, and updates her charts daily on TheStreet.com. Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback at