In the past few years, long-standing patterns and practices in the securities business have altered profoundly. In some cases, the significance of these alterations for the interpretation of certain technical indicators has probably passed unnoticed.
When the odd lot theory was formulated, for example, odd lot statistics traditionally showed a purchase balance. With the increase in split stock dividends, mergers and dividend reinvestment plans, huge amounts of odd lot shares have passed into the hands of investors without ever showing up in odd lot purchase statistics. As a result, only two of the last 17 years have shown purchase balances.
The pattern of member transactions is changing, too. Over the last 40 years, purchases generally equaled sales. Now, with certain specialist firms handling odd lots, purchases no longer equal sales. When customers are consistently selling on balance (as they have been since 1970), these firms accumulate vast amounts of odd lot shares, which they divest by selling in round lots. One can use specialists’ odd lot statistics to estimate the contribution of these offsets to member transactions.
Interpretation of short sale statistics is now complicated by the magnitude of off-floor member short sales, which is approaching that of specialists, and by the introduction of put options, which have drained away a great deal of what would normally have been short selling by member firms. And, whereas the technician could previously make fairly safe use of changes in margin debt to gauge the market activity of margin traders, he must now exercise caution. Between the spring of 1976 and the fall of 1977, customers used margin accounts to borrow cash for purposes other than buying or trading securities for credit. Only time will tell whether this development will turn out to be a permanent distorting element in the interpretation of margin debt.
Where his pet numbers are concerned, the watchword for the technical analyst has to be eternal vigilance.