Trading volume on the Nasdaq exchange was huge on Tuesday. It was the third highest volume in its history with over 13 billion shares exchanging hands. For some perspective, that was a level the stock market reached on April 9 when President Donald Trump put a pause on tariffs and the Nasdaq composite soared more than 12%.
So what kind of monumental news led to that activity? The answer may be underwhelming.
Historical Volume Skewed By Cheap Stocks
All the attention on the "Magnificent 7" comes down to the huge sway that companies worth trillions of dollars have on index movements. But Tuesday's volume rested on the activity of what you might call an "Inferior 7." Nearly 8 billion shares of that volume, or 58% of the entire exchange, came from seven stocks including: LogicMark, Damon, WW International, Bon Natural Life, Greenlane Holdings, AGM Group Holdings and Petros Pharmaceuticals.
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Why? News is sporadic on the group, but there is some. LogicMark announced some changes to its board of directors Monday. Further, WW International is partnering with pharmaceutical giant Eli Lilly.
But one thing the "Inferior 7" did have in common was that they all trade under $1 per share. When you consider dollar volume, these seven stocks had a lot less impact.
Dollar volume, a simple formula where you multiply the number of stocks traded by the stock price, gives a better sense of how much money is actually flowing when those shares are exchanging hands.
Those seven stocks accounted for just $769 million in trading combined. Again, for some perspective, the most dollar volume on the Nasdaq Tuesday came from Tesla. It traded just 108 million shares vs. the 8 billion from the seven cheap stocks. Yet Tesla generated 40 times dollar volume, with $31 billion. And that was actually below average for the electric-car maker.
If you add up the dollar volume, the seven stocks that accounted for 58% of the trading volume were just 0.28% of the Nasdaq's dollar volume. Of these minuscule seven stocks, two stocks, Damon and LogicMark, traded 5.8 billion shares combined, or 44% of the Nasdaq's overall volume. That's more than the average volume of the entire Nasdaq over the last 50 days.
Both LogicMark traded under 2 cents per share while Damon was going for less than 1 cent per share.
Investor's Business Daily recommends stocks that trade for at least at $10 per share with strong Relative Strength and Composite Ratings. IBD research also shows that stocks that are already in an uptrend are more likely to have successful breakouts.
Why Keeping Track Of Volume Matters On Stock Market
Volume on the exchanges is an important part of identifying topping and bottoming signals using the Investor's Business Daily Methodology. Follow-through days and distribution days both rely on comparing trading volume to the day before. The reason is volume can be an important clue as to where institutional investors are headed.
Historically there have always been skews to the volume for comparison purposes. Holidays, triple-witching option expirations and major index rebalancing tend to make it difficult sometimes to make volume comparisons day to day.
That's been exacerbated by an increasing number of variables to volume. Stocks split less than they used to as the cost savings for round-lot orders of 100 shares vanished. Decimalization reduced spreads from fractions of a dollar to sometimes fractions of a penny. That, plus faster computers, allowed high-frequency trading systems to get ever-thinner slices of profits at the margins as well as make profits by doing multiple trades per second.
No-commission fee structures removed the major penalties associated with trading cheap stocks. The explosion in options and exchange traded funds trickles down to the underlying components as shares need to be bought and sold by market makers managing risk or maintaining a proper value for the underlying components of the ETF basket. The list goes on.
So when more than half the trading volume on the Nasdaq exchange is from two stocks trading less than a nickel, that's not indicative of institutional investors' activity.
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