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A Speculative Trading Bubble, or Normal Market Rotation?

Has a speculative trading bubble formed? Or is normal rotation weighing on the stock market? Let’s take a closer look.

Dollar Sign Question Mark

Speculative trading by stock market investors is on the rise, prompting some to claim markets are approaching a bubble that could soon burst.

We’ve seen signs in many different data points recently. First, the volume of call options has been consistently exceeding puts for some time. This is especially true for small-size option transactions, or “odd-lot” call option buyers.

Second, the record-setting level of initial public stock offerings (IPOs), especially among the so-called “blank-check” companies, is another sign of potential market excess.


Last week, analysts at Sentimentrader raised another red flag, as you can see below.

This penny stock volume is a sign of speculative trading in the market - and a red flag.

The latest data through the end of February shows that the volume of penny stocks traded reached nearly 2 trillion shares. That’s the highest turnover in more than a decade.

And it adds up to the highest dollar volume in speculative penny stocks traded (at $84 billion) in the last 30 years. In fact, the only time penny stock volume was higher than last month was all the way back in the first quarter of 2000.

On the other hand, there are also a number of positive indicators, including strong market breadth, which tells a different story.

For instance, the number of stocks traded on the New York Stock Exchange (NYSE) making new 52-week highs has been climbing steadily over the past 12 months, according to a recent Twitter post from Schwab’s Liz Ann Sonders. Likewise, we’re seeing strong buying interest from investors, as you can see in the below chart (courtesy of Bloomberg).


This tells me that market breadth in the more established companies listed, i.e. those listed on the NYSE, remains quite strong. In other words, it’s not just low-priced speculative shares that are rallying.

Also, analysts at Bank of America Merrill Lynch noted last week that the NYSE advance-decline line remains near its highs, in spite of recent weakness. This means there are more stocks advancing higher than are falling by the wayside.

Likewise, the number of S&P 500 stocks trading above their 10-day price moving average has improved even on days when the blue-chip stock index has lost ground.

This tells me that, despite increased speculation in some areas of the market, strong market breadth adds up to nothing more than sector rotation taking place beneath the market’s surface. Investors are merely swapping some of their tech sector holdings for cyclicals like financial, industrial and energy stocks. And that’s a healthy sign for a continued bull market.

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Mike Burnick brings a wide range of experience in the financial services industry to Weiss Research . With over 25-years of professional investment experience, he was a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. Mike joined Weiss Research in 2002 as an analyst and writer, and in 2008 was named Director of Research and Client Communications at Weiss Capital Management, where he assisted managing the day-to-day asset-allocation and trading responsibilities for a $5 million ETF strategy. Formerly, Mike served as Director of Research for the Sovereign Society and in the role of senior editor. His responsibilities included analysis of global financial markets and economic trends focusing on global ETF and options investing. At present, Mike serves as Manager of Investment Services for Weiss Research, Chief Investment Strategist for the Extreme Profit Hunter service, and is a regular contributor to the firm’s daily e-newsletter, Money and Markets. Mike is a graduate of Stetson University with bachelor’s degrees in both finance and management. He is a frequent guest commentator on CNBC, Fox Business News, Bloomberg TV, and nationally syndicated financial talk radio programs.