Sector Investing

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SENTIMENT JOURNAL: Stocks Send Us On Roller Coaster Ride
By Frederic Ruffy, Optionetics.com
7/25/2003 4:00:00 PM

http://www.optionetics.com/articles/article_full.asp?idNo=8776

Market Internals: Stocks were volatile during the latest week of trading. After plunging 91 points Monday, the Dow Jones Industrial Average ($INDU) staged a two-day advance before taking another dip on Thursday. Friday, stocks traded quietly until about midday and then the Dow exploded to the upside. When all was said and done, stocks had taken us on a roller coaster ride and the industrial average added a little less than one hundred points. Market internals on the New York Stock Exchange [NYSE] were mixed during the week. For instance, up to down volume was negative on three of five occasions. At the same time, total volume was relatively light on the NYSE. The heavy volume day was during Thursday’s decline. Even then, however, total volume didn’t top 1.6 billions shares. Therefore, although the market made fairly large intra-day moves, there seemed to be relatively little conviction behind the buying or selling.

The Nasdaq Composite Index ($COMPQ) rose twice, fell three times, and finished the week up twenty points. Networking, Internet, and telecomm stocks were among the Nasdaq’s top performers. Weakness in biotech and computer stocks offset some of the strength, however. Market internals on the Nasdaq Stock Market were mostly mixed. The ratio of advancing to declining issues was positive during three of five occasions. Up volume surpassed down volume on three of five occasions. However, like on the NYSE, total volume was relatively light throughout the third full week of trading during the month of July.

Sentiment Data: The sentiment data was not much changed in the latest week. It continues to urge a cautious stance towards the stock market because overall picture suggests that a relatively high level of bullish sentiment has overcome the market. From a contrarian’s perspective, such a high level of bullish sentiment are a negative for the stock market because it indicates that the majority of investors, or the “crowd,” have gathered on one side of the market. When this happens, the path of least resistance is to the other side—in this case the majority of investors are displaying relatively high levels of bullishness, and that often translates into a bearish move in the stock market in the near future.

The evidence of bullish sentiment abound. For example, the latest survey of investor sentiment from Investors Intelligence currently shows 55% bullish and less than 20% bearish. The CBOE Volatility Index ($VIX) has slipped below the key 20% level. So, according to the VIX, a.k.a., the market’s so-called “fear gauge”, investors are showing little to no fear. Meanwhile, in the options market, put volume has been light. Friday, only 339,703 puts traded on the Chicago Board Options Exchange [CBOE], which (with the exception of the July 3rd half day of trading) is the lightest volume since mid-May. Consequently, Bollinger’s Put Volume Indicator [PVI], which measures put volume relative to the ten-day average, has fallen to .66. It is the lowest reading from PVI since mid-May and only the fourth time this year this indicator has dropped below .67. On two of those three other occasions (2/27 and 3/27), stocks slipped after the indicator dipped below that level.

Sector Performance (Week Ended July 25, 2003)

The gold and silver mining index surges during the latest week of trading. XAU is trading at its highs of the year and is up 30% since March. Current level (near 85) is next resistance.

The plunge in bond prices and the jump in rates continues. The ten-year rate index broke resistance at 40.00 (4% rate on the ten-year note), but now faces hurdle at 42. Still hasn’t broken long-term downtrend.

Cyclical stocks perform well for the second week in a row. The performance is noteworthy because they often lead the market. CYC closes at the week’s highs and the upside momentum is strong. Bearish non-confirmations from MACD and RSI.

Mid caps lead the market in the latest week of trading. MID faces major resistance at 495-500 and broke trendline support last week. Several indicators hint at a reversal.

Biotechs give back some of their recent gains. In the bigger picture, BTK appears to be consolidating its recent gains. Watch for a break above 560 as a bullish sign. A move below Friday’s lows (460) is bearish.

Computer stocks fell during the latest week of trading. GHA broke trendline support two weeks ago and momentum is clearly to the downside. Testing support at 210. A move to 190 break long-term untrend.

Oil service stocks are among the worst performers this week. OSX is testing support at 85 and stochastics screams oversold