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SENTIMENT JOURNAL: Bulls Still Cheering as Techs March Higher
By Frederic Ruffy, Optionetics.com
7/11/2003 4:45:00 PM

http://www.optionetics.com/articles/article_full.asp?idNo=8690

Market Internals: The Dow Jones Industrial Average ($INDU) finished a volatile week modestly higher. The Dow rose three times, fell twice, and added almost 50 points. Market internals on the New York Stock Exchange [NYSE] were modestly positive and on two occasions (Monday and Friday) advancing issues topped declining issues more than two to one. Stocks traded mixed Tuesday and Wednesday. Thursday was a disaster with down volume outpacing up volume more than four-to-one and advancing issues trailing declining issues more than two-to-one. Furthermore, the NYSE New High-New Low Index deteriorated significantly as the week progressed. Monday, 361 stocks were setting new 52-week highs on the Big Board, compared to only 10 new lows. By Friday, the ratio had fallen to 176 highs compared to only one new low.

The Nasdaq Composite Index ($COMPQ) performed much better than the Dow once again. For the week, the composite index rose nearly 70 points or 4.2%. In addition, market internals were net positive in Nasdaq trading and trading was active. Tuesday and Wednesday, total volume on the Nasdaq Stock Market topped 2 billion shares. Up volume surpassed 1.3 billion shares Monday through Wednesday. Thursday sellers took the Nasdaq sharply lower and down volume swelled to 1.4 billion shares. By Friday, it was back to business as usual, however, and up volume outpaced down volume more than two-to-one and advancing issues led declining issues by a similar two-to-one margin. Overall, the technical action on the Nasdaq remains strong.

Sentiment Data: The overall action of the market has produced a great deal of bullish sentiment. It has been visible in a number of ways. For instance, call buying in individual technology stocks has sometimes been extreme. Early this week, Yahoo (YHOO) calls were extremely active as investors placed bets that the company would report blockbuster earnings. Shares of the Internet giant had skyrocketed more than 250% in the previous nine months. Yet, despite the gains, investors and call buyers were still betting that the stock could continue to move higher following it earnings report. Then, even though the company easily beat analyst earnings estimates, and revenues surpassed even the most optimistic expectations, not only did YHOO fall sharply, the entire tech sector collapsed following Yahoo’s earnings report Thursday.

The danger with high levels of bullish sentiment is that, when investors become too optimistic, there is a risk that the best-case scenario is already reflected in current stock prices. From that point forward, the earnings picture can continue to improve, but stocks don’t move higher because most of the buyers have already bought their fare share. In addition, high levels of bullish sentiment open the door for disappointment if the best-case scenario does not unfold as expected. In that case, bulls turn to bears, buyers become sellers, and stocks fall.

So, what are the signs of excessive bullish sentiment one should look out for? I’m glad you asked. The CBOE Volatility Index ($VIX)—a.k.a. the market’s “fear gauge”—is once again approaching 20% and low levels seen at or near previous market tops. If VIX continues to fall from current levels of 20.7%, it will be a sign that bearish sentiment has fallen to extreme lows and bullish sentiment is therefore high. The action in the options market can also be telling. Are calls much more active than puts? The CBOE put-to-call ratio can help answer that question. If it falls below .50, it is a sign that calls are two times more active than puts, and bullish sentiment is therefore high. As we can see from the table below, the indicator remained in a .63 to .98 range in the latest week. Readings above 1.00, incidentally, are a sign of excessive bearish sentiment. Finally, the surveys of investor sentiment such as the one conducted by Investor’s Intelligence are worth watching. In the latest week, Investors Intelligence reports that bullish sentiment has risen to 56.5% and bearish sentiment is only 18.5%. Such a lopsided percentage of bulls and bears is relatively rare and is further evidence that the recent improvement in the stock market has created a relatively high level of bullishness among investors.

Chip stocks lead the market rally. SOX is in an upward sloping trading channel, but appears to be forming double top. MACD points lower. Move above 400 is bullish.

Biotechs are leading once again and BTK is trying to move back up to June highs. Biotech bulls can consider using a break of support (460) as a stop loss.

Transportation stocks are strong. This should be good news for Dow Theorists, if there are any left. TRAN rose to new one year highs this week, but chart looks ominously like a double top.

Large cap tech stocks lead the market for the second week in a row. NDX breaks through previous high at 1,250 and is trading within an obvious trading channel. 1,350 is the next major resistance on the upside.

Gold stocks continue to see weakness and investors become less risk averse. RSI continues to point lower as momentum appears to be shifting to the downside.

Oil service stocks are still weak and OSX is falls through support 90. RSI is giving a bullish divergence on the daily chart and OSX is approaching trendline support.

Utility stocks are week and the DJ Utility Average is rolling over and falling out of a head and shoulders top. Is this a leading indicator? If so, look for similar patterns on the major averages.