Hi Jon, Hi Rocky
Thanks for sharing your views. Your discussion is one which has raged in my head for some time. Rocky, I too have observed that volume versus float is a significant factor currently driving the high flying internet stocks. In fact, while the records no longer exist, I remember making this observation somewhere here on SI back in 1997. I only wished I'd backed my words with actions. I would be retired by now.
Since then I've had many opportunities to observe the Volume vs. Float scenario and have refined my viewpoint; it isn't an observation of market direction or of supply and demand, but one of increased liquidity which then translates into MOMENTUM. It then becomes a study of how far a stock can move and its thrust while doing so (increased average daily range) as opposed to a predictor of direction.
Compare it, lets say, to a rubber band propelled toy airplane; it's thrust is proportionate to the thickness and length of the rubber band. The thicker the rubber band the greater the airplanes thrust given that the length of the rubber band is fixed. There are other variables such as aerodynamic design for example, but for the sake of simplicity we'll consider those factors to be fixed as well.In my stock market / toy airplane metaphor, the relationship between a securities volume vs. float is similar to the toy airplane's rubber band thickness vs. length. As compared to the length of the rubber band, the company's fundamental value (float being a single factor) changes slowly (quarterly), so we'll consider the float to be fixed as well, now the primary focus of our observation becomes the thickness of the rubber band or daily volume as it relates to the fundamentals (the float). Volume vs Float only remains relevant as long as the company's fundamental characteristics do not change. But it is one of the few studies which take both the fundamental and sentimental characteristics into consideration and it does so simply.
While I'm not a subscriber to the MM conspiracy theory, I do know that a certain amount of conspiracy by design exists in the form of a desire for a greater return on money and time for the MM's. The MM's are supposedly there to create market liquidity but in fact the reverse is true; Market liquidity draws the attention and participation of the MM's. Stock prices are then bid up (or offered down) to extremes in order to accommodate the larger number of big (and active)market participants.
Just my take on it all
Schmedley |
