Sector Investing

[ReturntoSender]

SENTIMENT JOURNAL: Three-Day Sell-Off Rouses No Angst
By Frederic Ruffy, Optionetics.com
7/18/2003 1:00:00 PM

http://www.optionetics.com/articles/article_full.asp?idNo=8730

Market Internals: After surging Monday morning, stocks began a three-day retreat that led to a noticeable deterioration in market internals. Early Monday, buyers stepped into the stock market and drove the Dow Jones Industrial Average ($INDU) up 140 points in early trading. That, however, proved to be the highs for the week and, from that point forward, stocks fell Tuesday through Thursday. During those three trading sessions, the ratio of advancing to declining issues on the New York Stock Exchange [NYSE] was more than two-to-one negative. In addition, up volume trounced down volume. For example, on Thursday, although the industrial average fell only 44 points, down volume outpaced up volume nearly four-to-one. In fact, for the week, the Dow moved modestly higher, but its performance masked what to proved to be significant erosion in market internals.

The Nasdaq Composite Index ($COMPQ) lost ground during the latest week of trading. By Friday afternoon, the Nasdaq was sporting a 1.5% loss. However, the performance of the Nasdaq also failed to represent what proved to be rather heavy selling in the technology sector during the past few days. For instance, on Thursday, up volume lagged down volume nearly ten-to-one on the Nasdaq Stock Market. Advancing issues trailed declining issues by a three-to-one margin. In addition, market internals on the Nasdaq Stock Market were overwhelmingly negative Tuesday through Thursday and mixed early Friday. On the week, Internet, networking, and software stocks all gave up considerable ground.

Sentiment Data: The deterioration of the market internals is a worrisome sign given that bullish sentiment had reached such an extreme during previous weeks. For example, the CBOE Volatility Index ($VIX)—a.k.a. the market’s “fear gauge”—fell towards the key 20% level last Friday. VIX has since risen above 22%, but there is still relatively little investor angst or anxiety reflected in the market’s so-called “fear gauge”. Monday, the equity only put-to-call ratio, which measures the total number of stock call options compared to equity put options, fell to .40. The low reading indicates that call buyers were much more active than put traders, and that is also a sign of relatively high bullish sentiment. In addition, the sentiment surveys, like those conducted weekly by Investor’s Intelligence, are showing increasing bullish sentiment. In the latest week, Investors Intelligence reports that bullish sentiment has risen to 57.4% from 56.5% and bearish sentiment is only 17.0%, compared to 18.5% the week before. Such a lopsided percentage of bulls and bears is relatively rare and is further confirmation that bullishness among investors has reached extreme levels.

Deteriorating market internals coupled with high levels of bullish sentiment are sometimes the recipe for disaster in the stock market. Of course, only one week of lackluster performance from the Dow or the Nasdaq does not a trend make. This latest week of trading could very well prove to be just a momentary pullback in the midst of a healthy market advance. It is obviously very difficult to say. Nevertheless, history has shown us that volatility goes in cycles. In other words, increasing volatility generally follows periods of low volatility and times of extremely high volatility pave the way for periods of quiet trading. This holds true for individual stocks, sectors, and the market as a whole. In this case, we have just passed through a relatively quiet period of trading for the stock market as a whole, and it would therefore not be at all surprising if stocks continue to experience a bit of turbulence going forward.

The big story on the week was the plunge in bond prices and the jump in rates. The ten-year rate index has resistance at 40.00 (4% rate on the ten-year note). If it breaks, look for volatility to jump higher.

Oil service stocks are among the top performers this week. OSX holds support at 85 and looks to test resistance along its downward sloping trendline.

Cyclical stocks perform relatively well this week and their performance is noteworthy because they often lead the market. Now testing resistance level near June highs (515).

Small caps are among the weakest. RUT falls more than 2% in the latest week and appears to be moving down from seriously overbought levels. Next support is right now at 460.

Airline stocks are losing altitude after performing exceptionally well during the second quarter. XAL has suffered trendline failure and momentum indicators point lower.

Dot com stocks suffer significant losses during the latest week of trading. DOT gapped down and broke trendline support. If it fills the gap, look to short at higher prices. If not, momentum appears to have shifted.

Networking stocks suffer the greatest losses during the latest week of trading. NWX is coming off of overbought levels and may be falling out of a double top. Look for support here, but it is precarious.