|  OCT 1989

Speculative indicators by Arthur Merrill

Heavy speculation is a sign of a dangerous market— one that is riding for a fall. I believe I was the first to suggest, in a 1963 radio interview, that the volume of the American Stock Exchange (AMEX) could be used as a measure of the degree of speculation. The reason is simple. Typical stocks listed on the AMEX tend to be smaller in capitalization and more volatile in price—the type of stock preferred by a speculator who wants fast action. In recent years, the Over-the-Counter exchange has become prominent. Typical OTC stocks are even more volatile than those on the AMEX. It has been suggested that OTC volume could be an even more sensitive indicator of speculation than the volume on the AMEX. Because the number of shares listed varies over the years in various markets, I have plotted volume's deviation from a 3.77% exponential average over the past five years (Figures 1 and 2). A characteristic that is quite evident in these charts is a year-end seasonal effect. Note speculation increases in the last weeks of almost every year, culminating in an upward spike the last week.

by Arthur A. Merrill, C.M.T.