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SENTIMENT JOURNAL: Bulls 60, Bears 16
By Frederic Ruffy, Optionetics.com
6/20/2003 3:00:00 PM

Market Internals: Stocks made little progress during the past two weeks. Two weeks ago, the Dow Jones Industrial Average ($INDU) finished up 50 points. In the latest week of trading, the industrial average rose three times, fell twice, and added 73 points. Meanwhile, market internals on the New York Stock Exchange [NYSE] are beginning to deteriorate and the ratio of advancing to declining issues has been negative in four of the past six trading sessions. In addition, we are beginning to see more and more days where down volume exceeds up volume. Finally, the NYSE new high-new low index, which was +460 last Thursday, is now only +95 with 98 stocks setting new 52-week highs and 3 setting new 52-week lows. Therefore, while it may be a bit early to throw in the towel on the recent uptrend, the deterioration the breadth of the market (i.e. advance/declines, up/down volume, and the new high new-new low indicator) is worth watching as we move forward.

Sentiment Data: While market internals have been deteriorating, the sentiment data is urging caution once again. A number of indicators have been pointing to high levels of bullish sentiment and complacency for several months now. Yet, since market internals were improving and the technical action of the market was pointing to increasing strength, the bullish sentiment did not necessarily pose a threat to the market’s advance. Indeed, increasing bullish sentiment was helping to push prices higher. Yet, if the technical action of the market continues to deteriorate as it has, it is often a leading indication that stocks are weakening. At that point, the powerful momentum that has been driving fresh new money into the market ceases. Without rising stock prices, there is less incentive to join the ranks of bulls. If it persists, and the selling intensifies, the bulls begin to shift into the bear camp and the aggressive buying witnessed during the past three months turns into aggressive selling.

So, just how bullish is market sentiment today? According to the latest sentiment survey by Investors Intelligence, bulls are now 60.2%, compared to only 16.1% bears. Obviously, based on that survey, there are a lot of bulls that could eventually shift into the bear camp. Options traders are also bullish. As evidence, the CBOE equity only put-to-call ratio, which compares the number of stock call options traded to the numbers of puts traded each day on the Chicago Board Options Exchange [CBOE], averaged .44 this week. That, in turn, indicates two times more equity call activity compared to equity puts. Friday, the ratio finished at only .36. That is the lowest reading from the ratio in more than a year! Meanwhile, the CBOE Volatility Index ($VIX)—a.k.a. the market’s “fear gauge”—finished the week reading 21.09% and near its lowest levels in more than a year. Therefore, there is little fear or angst currently reflected in VIX and that is often the case when bullish sentiment has reached an extreme.

Going forward, the key to the uptrend will be strong market internals and the type of momentum that will keep investors bullish. If bearish sentiment or pessimism begins to creep into the market, there are a great number of bulls that could defect into the bear camp. That, of course, would mean buyers turn into sellers. The key to watch is the technical action of the market next week and market internals. If they deteriorate further and the major averages such as the Dow begin to break their upward trends on the daily charts, it will be a sign that the momentum is once again shifting to the downside.

http://www.optionetics.com/articles/article_full.asp?idNo=8571