Speculative fever is rising and that's never a good thing after the market has already rallied because it typically marks the beginning of the end of the bull market. I touched on this point with a couple of anecdotal points but it's now a fact that speculation is indeed rising rapidly.
One of the time tested methods to gage speculative activity is to compare the volume of NYSE stocks to NASDAQ stocks. NASDAQ stocks are considered to be more volatile and of "lower quality" than NYSE stocks and, therefore, when NASDAQ volume advances rapidly, it's generally a sign that investors are "reaching" for higher returns by speculating. This phenomenon was clearly seen in the tech bubble during 2000, when NASDAQ volume was 2x as high as NYSE volume. Prior to that, a ratio of 1.4 to 1.5x NASDAQ volume to NYSE volume was considered a speculative frenzy.
And, as measured by the 10 moving average of NASDAQ/NYSE volume, we are approaching that level now. You can see from the following chart, that when NASDAQ/NYSE volume rolls over between 1.3x and 1.5x, an intermediate market top is typically near by.
Even more disturbing is an observation that Jason Goeford made on Sentimentrader.com on Monday. He pointed out that, "there was a jaw-dropping spike in share volume traded in the Over The Counter market." The Over The Counter market, in this case, refers to penny stocks. Thanks to penny stock promoters such as Jonathan Lebed volume in these stocks has been exploding. And while in the near term such activity looks and feels bullish, these types of speculative frenzies "typically come near the end of bull runs."
Chart courtesy Sentimentrader.com