Wow, busy thread this weekend, hope this isn't the bottom of the market.
Dennis, as to distribution, while I agree with LG about it being somewhat subjective, I realize that people want something more specific to work from. I use TRIN heavily but I compare it with price action. In other words, if the market is going up, and the TRIN is around.5, that is OK and healthy. If the Market is going down strong and the TRIN is 1.5, that too is OK in a bearish way. However, if the Market is going up and the TRIN is 1.3 like it was a couple months ago, then the big boys are selling into the rally. Same as for spotting potential bottoms. If we are selling off strong yet the TRIN goes to say .5. they are accumulating the cheap shares.
I do not use TRIN all by itself either. Volume is a large player and like the other poster, I use it in combination with price but also with chart patterns. If a stock fell and was basing like LG's IBM call a while back, there was a long period where IBM just sat, trading flat with minor up and down oscillations on low volume. As the volume starting picking up with little price movement, a signal was given that something was going on. At this point it could go either way so you must dig deeper. A look at quote coms or any other intra day chart provider's chart would have allowed you to look at hourly charts, or 12 minute charts which are my personal favorite, and see if the pattern was bullish or bearish. This is where it kind of gets tricky, you almost have to look at the big blocks versus the smaller blocks and do the math to see which side is winning. I consider it bullish if a large block moves the price up then a series of small orders drop the price back down before a large block or series of blocks moves it up again and then the small lots move it back down. It is a throbbing type action that is tying to mask the accumulation of stock without alerting anyone. It can work the opposite way as well as when you see small lots bidding the price up then a large block moves the price down then large blocks disappear until the buyers are able to step up and increase the demand once more so there is a "market" for the large block seller and he dumps off to the waiting little orders once more.
Lastly, I look at the trend and the candle sticks. A sharp rally in a stock with a day suddenly appearing with huge volume that either forms a harami, hanging man, doji or even a large white candle, especially shooting stars is a clear sign of a one day change of heart and the big guys are taking advantage of the mo mo crowd to dump as much stock as fast as possible.
To address Gersh's question about distribution via calls showing in the volume of the market. It is a loaded question with no right answer unfortunately. On a simple basis, No, the stock trades and volume would not show it since there is no sale of physical stock, only the promise to sell at the time of expiration and the stock could still sit with the original owner until the option is exercised at which time, then it would show up.
To further complicate things though, yes it could show up. <ggg> Many times, market makers will hedge their option trades by buying or selling physical stock to counter their option trades especially if they are possibly going to get stuck with the position due to a lack of people on the other end of the trade. In this case, yes, you would see the opposing side of the trade. To further throw a wrinkle in the equation.... Most options on our exchange are American and not European options. The difference is that European options can only be exercised on the expiration date. American style options however can be exercised at ANY time! Therefor, I could buy an option today that is deep in the money, call my broker and say I want to exercise immediately and the stock would be called away tomorrow and you would see the ticker show the transaction in both price and volume.
This leads me to a question that was raised by a few here a couple days ago that I was mulling over this weekend about the Mutual Funds being low on cash. I will counter with another question to spur discussion. Couldn't Funds sell covered calls to raise capital needed to fund outflows with out selling physical stock? I mean if I am a huge Mutual fund holding millions and millions of shares in MSFT, the money I could put together by selling deep in the money calls against my physical stock should finance all but a mass exodus in redemptions, No???
We discussed this a long time ago on the TSO thread when it was asked how an option player could play a true market collapse since buying puts was having faith that the seller would still have money left to pay you at the bottom. After a long discussion, it was agreed that teh only "safe" way to play a true crash ( discounting the chance that you are wrong and the market bounces) was to sell calls all the way down so you are receiving cash up front and letting the calls expire worthless.
Lastly, I was commenting about how a spark was missing for a sell off and I suddenly realized we had forgotten about a topic covered heavily for a long time before the Y2K change over. Wasn't there some serious discussion about how there were glitches made in the repair of Y2K programming etc since this year is a Leap year that breaks some of the regular rules of previous Leap years? Considering that Feb 29th is this week, do I smell something burning?????????
Good Luck,
Lee |
