02-02-2013, 12:19 AM
From: marketinout.com
If we could find an investor who was always wrong and do the exact opposite of him, we would always be right! Odd lot indicators strive to do just that. If we assume that small investors ("odd lotters") are inexperienced (and thus usually wrong), then trading contrarily to the odd lot traders should be profit-able.
The higher the OLSR indicator, the higher the percentage of odd lot shorts and the more likely the market will rise (proving the odd lotters wrong). Similarly, the lower the OLSR, the more likely a market decline.
Generally this rule (invest contrarily to the odd lotters) has held true. Odd lotters tend to be reactive rather than proactive. High Odd Lot Short Ratios tend to come after major market declines (when investors should be buying, not selling) and low readings usually come after long market advances.
In 1986, the number of odd lot shorts reached levels that were unheard of. The explanation I have heard for this is that specialists are placing multiple odd lot short orders to avoid the up-tick rule which states that a short order must be processed on an up tick. They do this on days with major declines in prices.
If this explanation is true, it drastically complicates the interpretation of all odd lot indicators. It would mean that the odd lot indicators show what the "littlest" guy is doing, except when it reaches extreme readings in which case it would show what the "biggest" guy (the members) is doing
If we could find an investor who was always wrong and do the exact opposite of him, we would always be right! Odd lot indicators strive to do just that. If we assume that small investors ("odd lotters") are inexperienced (and thus usually wrong), then trading contrarily to the odd lot traders should be profit-able.
The higher the OLSR indicator, the higher the percentage of odd lot shorts and the more likely the market will rise (proving the odd lotters wrong). Similarly, the lower the OLSR, the more likely a market decline.
Generally this rule (invest contrarily to the odd lotters) has held true. Odd lotters tend to be reactive rather than proactive. High Odd Lot Short Ratios tend to come after major market declines (when investors should be buying, not selling) and low readings usually come after long market advances.
In 1986, the number of odd lot shorts reached levels that were unheard of. The explanation I have heard for this is that specialists are placing multiple odd lot short orders to avoid the up-tick rule which states that a short order must be processed on an up tick. They do this on days with major declines in prices.
If this explanation is true, it drastically complicates the interpretation of all odd lot indicators. It would mean that the odd lot indicators show what the "littlest" guy is doing, except when it reaches extreme readings in which case it would show what the "biggest" guy (the members) is doing