Does the Market Show an Upward Reversal After a Substantial Increase in Turnover?

Does the market show an upward reversal after a substantial increase in Turnover?

The total turnover of the stock market is one of the behavioral elements, considered to assess the market participation and with it, the trend of the market. The overall market turnover is based on the amount that is traded over time and is dependent on the supply and demand of the stocks. The total turnover can be interpreted as the liquidity of the stock market.

Total Turnover

Total turnover is a metric for gauging how much trading activity took place in the market for a particular period.

The total turnover in the stock market has been taken into consideration across global markets while analyzing the trend. It is believed that high turnover in the uptrend signals a buying opportunity and decreasing turnover in the uptrend may signal to sell and book realized profits as the market may be maturing or readying for bearish movement. Similarly, rising volume in a downtrend can signal that it's best to stay on the sidelines but consider buying when the volume decreases significantly as this may indicate near the end of bearish sentiment. But, is it true in the Nepalese stock market??

Here, we try to understand the correlation between Nepse Index and Total turnover through Pearson correlation.

Pearson Correlation

The Pearson correlation gauges how strongly two variables are correlated linearly. Its range of values is from -1 to 1, with -1 denoting a completely negative linear correlation, 0 denoting no correlation, and 1 denoting a positive correlation.

The results show that Nepse Index and total turnover are positively correlated with each other. A correlation of 0.813 shows a strong, positive correlation between Nepse and Turnover which is significant at the 0.0l level.

Limitation of the study

The data is obtained from System X.

Whether turnover leads to market movement or vice-versa or causal relationship between the two needs to be assessed to have a holistic conclusion.

Conclusion

Nowadays, Social Media has an impact on the stock market in terms of hitting stocks or creating hype for investments. Many Investors tend to move with social media and fail to make an investment decision. The market has a cycle (bull and bear) based on the change in both micro and macro factors. Including volume turnover in the study may help to understand the trend/ cycles of the market, which lead to sound investment decisions.

Disclaimer

This research is done only for knowledge purposes; it is advised to investors to make investment decisions based on their own analysis.

Roshni Pandit

Research Analyst

(CBIL Capital)