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SENTIMENT JOURNAL: Investors Turn Cautious Amid Weak Market Action
By Frederic Ruffy, Optionetics.com
4/14/2006 10:45 AM EST

http://optionetics.com/articles/article_full.asp?idNo=14653

Market Internals: The Dow Jones Industrial Average ($INDU) rose three times and added 17 points in the holiday-shortened week of trading, but the gains in the industrials mask otherwise weak market action. On the New York Stock Exchange [NHNL], market breadth was negative throughout the week, with advancers trailing decliners during three of four trading sessions. Up volume outpaced down volume only twice. Meanwhile, the NYSE New High New Low Index [NHNL] sank into the red. It fell from +170 last week to –127 on Thursday (with 61 stocks rising to new 52-week highs and 188 falling to new lows.)

In NASDAQ trading, the Composite Index ($COMPQ) fell two times for a 13-point loss. Internals were mixed with advancers trailing decliners during two of four trading sessions. However, overall volume during the second half of the week was unimpressive and followed three days of relentless selling that began on Friday. As we can see from the table above, NASDAQ down volume totaled more than 1.2 billion shares during three consecutive trading sessions. On Tuesday, up volume trailed down volume by a margin of almost four-to-one. In sum, although the Dow rose during the latest week of trading, the gains in the average hide relatively aggressive selling along with deteriorating market internals on both the NYSE and the NASDAQ.

Sentiment Data: By some indications, investors have taken notice to the recent period of market weakness. The CBOE Volatility Index ($VIX), the market’s fear gauge, rose during four consecutive trading sessions, from 11.13 last Wednesday to a two-month high of 13 on Tuesday. Similarly, the NASDAQ Volatility Index ($VXN) rose from 15.63 to a one month high of more than 17 during that time.

Meanwhile, investor appetite for call options seems to be waning. The ISE Sentiment Index [ISEE], which measures call purchases divided by put purchases (x 100) on the International Securities Exchange [ISE], fell to only 105 on Thursday. Although the index might have been distorted somewhat due to the low volume associated with the holiday, a reading of 105 represents a 52-week low for the index. Figure 1 shows the ten-day average of the ISEE. At only 146, it is at the low end of its recent range.

Figure 1: ISEE Ten-Day Average

While the ISEE and the VIX indicate that the investors are a bit more defensive than in the recent past, not all indicators point to rising levels of bearish sentiment. For example, the latest survey from Investors Intelligence showed an increase in bullishness. The survey reports that 53.2% of those polled are bullish and only 24.5% are bullish. The survey hasn’t been this lopsided since January 25.

So, although the latest market decline has stirred up a bit more angst, the overall sentiment picture remains mixed. It is still not offering much of a guide regarding which way stocks might be headed. In this situation, I generally defer to the technical action of the market for guidance. Unfortunately, as was noted in the two opening paragraphs, the market action from that perspective has turned somewhat negative.

Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site