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angusthermopylae (36.94)

Where'd the Spike Go?

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March 30, 2009 – Comments (15) | RELATED TICKERS: SPI , KED

Half serious question, half conspiracy rant:

If you look at the volume for the last 5 days of trading, on each of the up days there has been a huge spike in volume at the end of each trading day.  Someone (and for the life of me, I can't remember or find the post) pointed this out near the beginning of the recent...."rally."

I was so intrigued by the question in that article (russiangambit?  maybe TMFDeej?  EverydayInvestor?) that I've been keeping an eye on it for the last week or so...and, sure enough, at the end of each trading day, it's there.

But, the last two days have seen the spike gone.  And those two days are solidly bad...it's up to theprognosticators out there to say if it portends good or ill for the next few days, but the lack of "Spike" has me wondering....

Assumptions: 

1)  Trading volume = money movement...either in or out.  Each day the Spike has been  10x or more any other "normal trading" that day....so a lot of money is moving at the very end...a heck of a lot of money!

2)  I haven't heard (though I'm far from the halls of Wall Street) of any phone outages, computer meltdowns, or overloads on the markets.  Does this mean that the huge volume is not coming from small traders, but a few (very) big movers?

3)  The money flow should be fairly simple to follow, correct?  Individual or sectors of the Dow should either imitate or add up to this same pattern.

So, come one, come all--conspiracy theorists, technical analysts, and sociologists:   Where's the Spike?  Why was it there?  Who (individually or collectively) created it, and why did they stop?

Enquiring minds want to know...

15 Comments – Post Your Own

#1) On March 30, 2009 at 10:55 PM, AnomaLee (30.09) wrote:

I've certainly noticed. I know I made mention of this last week on Thursday [26 March] in the comment section of my post Full of Bull

"The huge divergent spikes in volume activity clearly show that most of these intraday rallies are being caused by a few financial whales [moving the market higher as of late]

But, even multi-billion dollar firms and accounts run out of money. If the intra-day volume were more broad and less divergent then I'd have different thoughts.

I've been 100% cash since mid-Monday[been fully cash on most overnights for months], but I'm going to start a few hedged positions tomorrow. I haven't seen a 3% drop, but I'm counting down three sessions. I'm just getting ahead of next week."

I wouldn't advocate any "conspiracies." Looking at the chart I remember that Monday was the continuation of contract settlements and the Treasury Secretary's "plan" created a lot of buzz during the open.

There is always pressure to finalize trades before the end of each trading session. Last week was the quarter end for most funds and this likely resulted in the dramatic spikes in volume since most investment funds were trying re-allocate their portfolios. No one wants to publish they are still holding Citigroup on their quarterly report.

Also, a few billion was of in-flows were likely the result of the Federal Reserve initiating their plan to purchase Treasuries last Wednesday resulting in many funds selling their bonds and purchasing stocks.

i try to process the trades by coupling the news with the charts. I'd guess that if the "independent" FASB changes the FAS-157 [better known as mark to market rule] that you could see a huge pop and spike in activity resulting in a head and shoulders formation placing near or over 800 on the S&P before we trend down again. 

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#2) On March 30, 2009 at 10:57 PM, AnomaLee (30.09) wrote:

I apologize for the poor grammar and typos. I was in a hurry.

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#3) On March 30, 2009 at 11:10 PM, russiangambit (99.18) wrote:

This is institutional money, clearly. Big trading firms, hedge funds, mutual funds. Many are closing their intraday positions, plus ETF settlements. Many know that end of trading day is super volatile so I think they use it to cover their tracks.

My impression that when there is some sort of a news leak, you see a major reversal at the end of the day, i.e. short covering, and the next day is positive to neutral. Every time  there was major government news , like shortselling ban you would see those short covering at the end of the day 2 days prior.I rarely see high volume sell off at the end of the day. But usually it is a signal that things are going to be bad going forward.

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#4) On March 30, 2009 at 11:19 PM, russiangambit (99.18) wrote:

One more thing, if one is engaged in naked shortselling it is a prudent thing not to carry that position overnight. Also when there is a stock being beaten down really heavily like 20%, you'll see a short-covering spike at the close.

As for your question , - where did the spike go. I think we established it was mostly short covering rally magnified by the quarter end window dressing. And so now it is over. People covered and started getting short again.

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#5) On March 30, 2009 at 11:25 PM, MarketBottom (30.68) wrote:

When Lehman filed bankruptcy, the court said that over two million trades remained open. How and when these are settled could account for some unusual activity.

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#6) On March 30, 2009 at 11:30 PM, nau99 (29.04) wrote:

I agree with the "institutional investors" theory as well. 

I don't think we're up against a major sellout again... just yet.  I think we may move lower the next couple days here.  I think we're going to get some decisions on mark-to-market and up-tick within the next week.  Those decisions likely will give the market a short-term boost. 

HOWEVER... as earnings begin to come in for the quarter and investors begin to get their Q1 Mutual Fund statements (gulp!) I think we're going lower... possibly to retest the early March lows.

One of these days I'd like to be an optimist again.  That day isn't today... tomorrow doesn't look good either...

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#7) On March 31, 2009 at 12:37 AM, KamranatUCLA (30.13) wrote:

Theory:

People are playing the day to day game. Good news, stocks up for the day, they sell. Bad news, stocks down for the day they sell.

In order to play this day-day game they have to wait until the end of the day. 

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#8) On March 31, 2009 at 12:38 AM, KamranatUCLA (30.13) wrote:

sorry for the typo, it should have said   Stocks down for the day, they buy.

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#9) On March 31, 2009 at 12:50 AM, Option1307 (30.93) wrote:

 AnomaLee

Good call on the >3% down day btw... I forget when your window ended but if memory serves me correct, today did fall within your prediction. Nice work.

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#10) On March 31, 2009 at 7:02 AM, AnomaLee (30.09) wrote:

There is no theory about the cause being institutional investors. It's a fact. There is no stock "market" for the large indexes. There's only large funds and power brokers[with their own funds] that are the composite of the exchange. That's why it's called the flow of funds.

Option1307
Yes, I think I first made mention in one of GMX's posts [This Rally]. Then I carried the thought back over to my own posts throughout the week:

March 24, 2009 at 3:58 PM,
"...but after yesterday's big rally I don't even need to look at a chart. I'm going to count to five(five trading sessions) and enter a solid short position. I wouldn't be surprised if we see a massive drop[more than 3%] almost exactly 4 sessions from today."

It really wasn't a hard call. I just doubt most looked up the subsequent returns after historically high rallies. Some of the replies to that post made me laugh. There was a lot of bullish sentiment throughout last week and claims this rally would continue going higher after and even blow past 840 on the S&P[oh my goodness].

Thanks for the congratulations. I just made the highest return I've made on a short term trade in what seems far too long. [I miss the good old days with tech, ag, and solar stocks]

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#11) On March 31, 2009 at 7:25 AM, bigpeach (93.30) wrote:

Simple explanation. Mutual funds typically buy and sell from 3-4. Shareholders have until 2:30 (or 3:00, I can't remember exactly) to have any deposits or withdrawals effective that day. It's only after this time that funds know what their net flows are for the day, and they buy and sell accordingly.

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#12) On March 31, 2009 at 9:12 AM, angusthermopylae (36.94) wrote:

I'm pretty sure that, as everyone has mentioned, it's the big institutional investors who are making the late trades:  Can you imagine how many mom-and-pop investors it would take to make up that volume?  And all of them waiting for the last few minutes.

But, that leads to the following: We're talking about a much smaller group of people than the general investor community--a few hundred or thousand?

Anomalee and russiangambit, you both pointed out why it was happening--"end of day" and "not holding overnight"....good reasons.

But the only reason that they would stop on those down days is that either they canceled their orders before end of trade or decided not to trade at all....at least, as far as I can figure it.

What does that say about their mindset, as a whole?  Here at CAPS there are plenty of people talking about making money in a down market...there are ways.

But when the big traders and funds come to an apparent standstill on a down day, then they arent' thinking about making money at all, are they?  It seems more like they are either trying to preserve....or are happy to sit on their assets until the day/week/month settles out.

I'm not a big trader, but it seems that the behavior has a fundamental difference in mentality--either from planning, emotion, information, or capability (yeah, they've got lots of money, most don't....but it might be something else)

I'm not really pushing some conspiracy theory--just wanting to hear some deep thoughts on how this is playing out.  Things have changed...

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#13) On March 31, 2009 at 5:46 PM, AnomaLee (30.09) wrote:

"I'm not really pushing some conspiracy theory--just wanting to hear some deep thoughts on how this is playing out.  Things have changed..."

There hasn't really been any change. This is something that has gone on for years since the beginning of trade. The combined 'market value' for stocks in mutual funds was over $3 trillion as of February which probably accounts for nearly 1/3 of the total value of the U.S. stock market. Money equals power, and this is why the big mutual funds have so much power over the market. For the majority of the Russell 3000 stocks the big funds control the weighted price of these stocks. They are the herd that we all track and sometimes steer through the ticker.

The majority of daily flows on the major indexes are from targeted funds. These funds have certain criteria to fulfill that are very narrow. A good example would be small cap, large cap, and foreign funds where fund managers are legally obligated to target investments that are generally outlined in their guidelines, prospectus, etc.

There is pressure on fund managers to be active [because they're not paid to be inactive] and maintain specific holdings [no matter what]. Most funds keep less than 5% of their portfolio reserved in cash and typically have high cash turnover, so there is constantly a need to re-allocate their positions. For instance, over a $300 billion were withdrawn from mutual funds between January and February this year. The bid/ask price adjust throughout the sessions accordingly to demands and to any developments that may affect a core position.(ie. large-cap financials, GM, etc)

All of this is plays a large part for the wave like motion in the major indexes is the opening and closing of positions.

Companies with smaller market caps typically have higher betas because there are less investors. If a major fund decides to reduce or downgrade a $300 million stock it can fall precipitously. Declines or advances of 5% or more are more common. Sometimes you will notice hedge fund activity by looking at the volume weighted price actions.

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#14) On March 31, 2009 at 6:26 PM, angusthermopylae (36.94) wrote:

AnomaLee,

So, if I understand correctly, then it's not so much that the spike has gone up, but that other activity has gone down?  You're correct; I have seen something like this before; I just don't remeber it being so prominent as the beginning/end of the day.

I remember your point from the early Motley Fool days, talking about fund managers:  Sometimes they are stuck because they are too big, and can't make a move into a good small cap company because they would end up buying the whole things for chicken scratch...scratch by their standards.

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#15) On March 31, 2009 at 8:46 PM, AnomaLee (30.09) wrote:

angusthermopylae

"So, if I understand correctly, then it's not so much that the spike has gone up, but that other activity has gone down?  You're correct; I have seen something like this before; I just don't remeber it being so prominent as the beginning/end of the day."

Yea, most of the better funds probably stopped believing this rally around the 19th of March[from the volume action], and the volume is below almost all the major moving averages. A lot the action since are people late to the party making last minute changes.

Some other things:

- The average 5-day trade volume last week was less than 70% of the volume the week prior. 

- Even last week's major Monday rally had less buyers than the down session prior.

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