The Webster’s dictionary defines odd as not regular, expected or planned, differing markedly from the usual or ordinary.

Understandably, few people enjoy being the odd ball out. As a parent, if your child acts odd or shows unusual behavior, you likely become concerned. What if, as an investor or trader, the market displays odd behavior? Is there reason to be concerned?

As of late, the market has been acting odd, or different from the usual or ordinary. How so?

Let’s take trading volume as an example. Trading volume is important because it, in general, reflects the breadth and conviction behind the market’s moves. Historically, bull markets or developing bull markets have seen heavy buying on up days and light selling on down days.

Light selling amidst broad buying is part of a healthy process. Just as humans inhale and exhale, the market moves up and down within the general trend. A healthy person doesn’t labor or cough when breathing, just as a healthy market doesn’t labor upward on low volume, or move down on strong volume.
 
Oddity #1: Volume

Based on this analogy, the market must be suffering from some sort of cough or pneumonia. The average NYSE trading volume for the first 14 days of March was 1.02 billion shares. During that period of time, the Nasdaq (Nasdaq: QQQQ) rose 13 consecutive times.

This is the biggest winning streak in nearly 20 years and it came on low volume. The average volume for the first 14 trading days from 2005 – 2009 was 1.76 billion shares, 42% above this month’s average volume.

Last Friday, March 19, was the 15th trading day of March and happened to be a Quadruple Witching day. Quadruple Witching is when stock index futures, stock index options, stock futures and stock options expire. This usually results in more volatile activity.

In fact, volume nearly doubled on Friday to 1,97 billion shares. Incidentally, Friday was also the first day the S&P recorded a loss of more than 0.25% since late February. Even though advance/decline numbers were the worst since late January, nearly half of Friday’s volume occurred in the last two hours, which saw the indexes recover some of their losses.

To add another twist, volume on the previous Quadruple Witching day (in December 2009), was well over 3 billion traded shares, which makes Friday look insignificant. In the final tally, volume as an indicator, even though conflicting and at odds with itself, paints a predominant bearish picture.

Oddity #2: Sentiment and the VIX

There are multiple ways to measure investor sentiment. Investor’s Intelligence (II) polls investment advisors and newsletter writers, the America Association of individual Investors (AAII) polls retail investors, the National Association of Active Investment Managers (NAAIM) polls fund managers, and the Volatility Index (Chicago Options: ^VIX) measures the fear of option traders.

Contrarian investors use any or all of the above as indicators of crowd behavior. When one of them or, in particular, all of them reaches extremes, it is usually a sign that enough have jumped on the bandwagon, which usually occurs before a trend reversal.

To illustrate: In January 2009, investor sentiment had reached a bullish reading that was extreme for that particular point in time. The ETF Profit Strategy Newsletter issued a sell signal above Dow (NYSEArca: DIA) 9,000. After hovering above that mark for a few days, the Dow Jones (DJI: ^DJI), S&P 500 (SNP: ^GSPC) and Nasdaq (Nasdaq: ^IXIC) dropped nearly 30% in two months.

This 30% drop, following the 2008 meltdown resulted in the most extreme bearish reading in decades. According to the above-mentioned polls, less than one in five investors was bullish, while the bearish camp was overcrowded. According to Wall Street, Great Depression 2.0 was just around the corner.

On March 2nd, however, the ETF Profit Strategy Newsletter issued a buy alert and recommend buying long and leveraged long ETFs such as the Ultra Financial ProShares (NYSEArca: UYG), Ultra S&P 500 ProShares (NYSEArca: SSO), Financial Select Sector SPDRs (NYSEArca: XLF) and many others.

Investors, however, are quick to forgive and forget. Banks (NYSEArca: KBE) continue to be mired in risky business, stocks are up, and investors are bullish again. In January, bullish sentiment reached peaks not seen since 2007. True to form, the market corrected.

The January correction did its job and enthusiasm cooled off a bit. Interestingly, investors are less bullish today than they were two months ago, even though stocks are higher today than in January.

While the bullish sentiment is lagging, trader’s complacency is leading. Yesterday the VIX fall to new lows. 16.17 was the lowest reading since July, 2007. Do you remember what happened shortly thereafter? The market topped and dropped, as much as 54%.

The chart below illustrates the interaction between price, investors sentiment and the VIX.

Oddity #3: 2000 and 2007 all over again?

In hindsight, it seems that the January 2010 sentiment extremes were a false alarm. Additionally, the market seems to defy much of the technical tools available to us.

A look at the 2000 and 2007 major market peaks, however, shows that both times the indexes came back to retest and even overtake the prior tops within a few months. The term double top should thus be painfully familiar to us.

The fact that the stock market is creating extremes, both in terms of price, sentiment and duration, should be a warning to all who own stocks (NYSEArca: VTI) and even bonds (NYSEArca: AGG).

A volcano generally starts to bulge, release gases and create tremors before erupting. The same is true with the stock market.

The technology (NYSEArca: XLK) bubble took time to develop. The extent of the sub-prime crisis wasn’t fully understood (it probably still isn’t) until the major indexes shed 50% of their value. There are always tremors leading up to the main event.

Domestically, those tremors are low trading volume and ignorance towards declining real estate prices, rising unemployment, rising foreclosures, rising bank failures, etc.

Internationally, those tremors are seen in the default of Dubai World, bailout for Greece, ticking time bomb in Japan, and financial troubles in Spain, Portugal, Italy, Ireland, and many more.

Does that mean the market will fall apart tomorrow? Not necessarily. But historically, right now is the time to be careful and pro-active. Complacency hurt investors in 2000 and 2007. If there’s one wish many have, it is that they would have been more alert at the time everyone else wasn’t.

The above oddities all add up to cracks in the dam. Eventually the dam will rupture and give way to tremendous flooding, causing much damage and loss.
 
A few minutes of ‘out of the box’ thinking everyday can prevent a 2000 or 2007 like outcome for your portfolio. Each issue of the ETF Profit Strategy Newsletter includes a short, mid and long-term outlook for the stock market and major asset classes.

The April issue takes a look at the lessons learned from prior market tops, Japan and the 2000-day moving average. Oddities or irregularities don’t have to be your enemies. When interpreted correctly, they can be your ally.