I HAVE HAD a prior opportunity to read article in this issue of Journal which is concerned with Lot in general and more specifically with odd lot statistics on relatively few stocks for which information is available. Some of points made deserve further comment. The authors mention my ten-day balance ratio which is used to determine short-term trends in odd lot trading as compared with average price fluctuations. However, I also use a comparable long-term measurement based on monthly figures in order to see odd lot behavior in relation to more important price movements. The Balance Ratio for any given month is obtained by dividing odd lot sales for period by purchases. A three-months moving average of ratios is called Monthly Balance Index which has been computed back to 1920. When Monthly Balance Index is above 100, it means that sales have exceeded purchases over a three months period, while if purchases have exceeded sales, Index will be below 100. Until very recent years, average figure was about 90, although wide variations have taken place. The highest figure on record was in late 1962 at about 127 when odd lotters were-as usual -selling their heads off during beginning of a price advance that was destined to carry much higher. The lowest figure was just under 70 in 1957 on sharp market break of that year. Until then, fall of 1929 had stood as record when Monthly Balance Index had reached a low of 74. Remember that lower figure, greater proportion of odd lot buying. The article also says that Odd Lot Theory states that odd-lotter tends to buy more stock when prices are near their highs instead of buying near or at bottom of In addition, odd-lotter tends to sell more stock when prices are near their lows instead of selling when market is near its high. Klein recently tested validity of odd-lot theory and concluded that sales aspect of odd-lot theory is valid, i.e., majority of odd-lotters sell stocks near bottom of market. This conclusion is difficult to understand. On contrary, odd lotter has an extremely marked tendency to buy on weakness. Thus, buying will increase on way down in severe price declines and, in a broad sense, its maximum will occur around bottom. Buying may appear in moderate degree when a market top is being approached, but heaviest buying always occurs on declines. The idea that odd lotters wrongly buy at top and sell at bottom is not only incorrect, but is also a vast oversimplification of an extremely complex subject. However, there are classic, consistent patterns of mass behavior which appear in varying quantities of odd lot buying and selling and from these, much can be learned about future probabilities. Such patterns always fall into same sequence in relation to cyclical swings of stock prices (and usually on shorter-term moves as well). In brief, a decisive price decline is first regarded by odd lotters as a bargain day, and their buying increases. As slide continues, however, their earlier confidence is shaken and buying diminishes. Similarly, a reversal to upside in stock prices tends to be greeted with skepticism, and odd lot trading shifts to selling side. Ultimately, as persistence of advance overcomes initial doubts and fears, there ensues a swing to some buying, usually not long before market approaches a top. All foregoing boils down to fact that -although not necessarily wrong in end-does tend to become less correct in its actions just before market embarks on an important change in trend. From long-recorded experience, it is fair to say that changes in odd lot trading are evidence of shifts in sentiment. Despite all that is heard about taking bit in its teeth on upside, or dumping its holdings on a decline, record fails to support view that it is the public that makes major price trends. The early phases of literally every big advance in stock prices for past 45 years have found odd lot trading swinging over to selling side. Clearly, more powerful buyers not only offset such selling, but also more than absorbed all other supply. Similarly, every important price decline has been accompanied by greatly increased odd lot buying until near its end. This was true even in great collapse of 1929, which, according to Wall Street folklore, was triggered by forced sales from thinly margined small accounts. While such liquidation did occur, it is obvious from record that there was another influx of money from somewhere which resulted in greatest excess of odd lot buying since first stage of 1919-1921 bear GARFIELD A. DREW is President of Drew Investment Associates, Boston, Massachusetts, publishers of Drew Odd Lot Studies since 1949.
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Jun 1, 2002
David Barkin + 1
