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Saturday, March 10, 2007 9:28:24 AM
SENTIMENT JOURNAL: Put Volume Surges Amid Signs of Extreme Bearishness
By Frederic Ruffy, Optionetics.com
Published: March 9, 2007 6:45 PM EST
http://optionetics.com/market/articles/16852
Market Internals: The Dow Jones Industrial Average ($INDU) took a trip down to revisit 12,000 on Monday, but then bounced back in dramatic fashion with a 157-point rally on Tuesday. From that point forward, it was back and forth action with a noticeable decline in market volume and volatility. As we can see from the table above, volume on the New York Stock Exchange [NYSE] declined during every trading day this week and failed to break above 1.5 billion shares on Friday. Nevertheless, while volume was somewhat lacking, market internals were net positive. As the Dow posted a 162-point weekly gain for the week, up volume outpaced down volume during the past four trading sessions. Similarly, advancers beat decliners every day since Monday.
Meanwhile, the NASDAQ Composite Index ($COMPQ) rose during two of this week’s five trading sessions, but, thanks to a big gain on Tuesday, was able to finish the week with small gains. In contrast to last week’s surge in volume, trading was relatively uneventful during the second half of the week. Volume on the NASDAQ Stock Market never broke above 2 billion shares in final three days, when the composite index experienced average daily moves of less than 8 points.
Sentiment Indicators: The market’s rebound on Tuesday along with the quiet trading Wednesday through Friday helped ease market jitters. For example, the CBOE Volatility Index ($VIX), which on Monday rose above 20 percent for the first time in six months, now sits near 14 percent. The decline in the market “fear gauge” is one clear indication that risk perceptions are falling.
Indeed, there seems to be a growing consensus that the worst might be over for the equity markets. I heard one talking head on financial television explaining that many hedge funds and other “pros” are staying fully invested despite the recent turmoil in the US equity market. The main reason is that, last year, when a similar sell-off took share prices down in May and June, many of these same investors sold off risky assets. Consequently, when the market rebounded in the second half of the year, the hedge funds that sold in May and June were left underperforming the market for 2006. This time, they are staying the course. Now, naturally, one might ask if there are similarities between the stock market bottom of June and the situation before this week’s rebound?
Interestingly, many of the sentiment indicators have reached greater extremes than during the May/June market bottom. For example, put volume has been off the charts (relative to calls) and the total put to call ratio (for trading across all six US options exchanges) has been 1.00 or greater in nine of the past ten trading sessions. This ratio is a simple measure of put volume divided by call volume. When investors become anxious and begin looking to put options for portfolio protection, the put to call ratio will rise. The chart below shows the ten-day average. It has easily surpassed its May/June highs and is spiking into uncharted territory near 1.20.
Figure 1: Total Put-to-Call Ratio
In addition, it isn’t just the total put to call ratio that is reaching extremes. Other indicators hit records last week. The Trader’s Index ($TRIN) hit an all time high. The VIX posted its biggest one-day rise ever. The CBOE put-to-call ratio also set a new all-time high. The ISE Sentiment Index [ISEE] has also produced a series of low readings. The index, which measures call volume divided by put volume on the International Securities Exchange, has not rise above 1.00 since March 1. The ten-day average is below 1.00 and also below the levels seen in the summer of last year. Taken together, there is ample evidence to suggest that bearish sentiment has indeed reached levels that exceeded the previous market bottom of June 2006.
Yet, while investor sentiment is clearly very pessimistic, which is a positive from a contrary minded view of the market, there is also a risk of further bloodletting. The main reason is that the recent decline comes after a period of time when bullishness, optimism, and complacency had reached extremes. In addition, the latest decline lasted only a few days and the Dow is less than 4% from its record highs. In short, although bearish sentiment has reached an extreme, the market might not be very close to a bottom due to the mere and simple fact that it remains pretty darn close to a recent market top.
Sentiment Indicators—Past 7 Days
http://optionetics.com/market/articles/16852
Click on link above for more info. RtS
By Frederic Ruffy, Optionetics.com
Published: March 9, 2007 6:45 PM EST
http://optionetics.com/market/articles/16852
Market Internals: The Dow Jones Industrial Average ($INDU) took a trip down to revisit 12,000 on Monday, but then bounced back in dramatic fashion with a 157-point rally on Tuesday. From that point forward, it was back and forth action with a noticeable decline in market volume and volatility. As we can see from the table above, volume on the New York Stock Exchange [NYSE] declined during every trading day this week and failed to break above 1.5 billion shares on Friday. Nevertheless, while volume was somewhat lacking, market internals were net positive. As the Dow posted a 162-point weekly gain for the week, up volume outpaced down volume during the past four trading sessions. Similarly, advancers beat decliners every day since Monday.
Meanwhile, the NASDAQ Composite Index ($COMPQ) rose during two of this week’s five trading sessions, but, thanks to a big gain on Tuesday, was able to finish the week with small gains. In contrast to last week’s surge in volume, trading was relatively uneventful during the second half of the week. Volume on the NASDAQ Stock Market never broke above 2 billion shares in final three days, when the composite index experienced average daily moves of less than 8 points.
Sentiment Indicators: The market’s rebound on Tuesday along with the quiet trading Wednesday through Friday helped ease market jitters. For example, the CBOE Volatility Index ($VIX), which on Monday rose above 20 percent for the first time in six months, now sits near 14 percent. The decline in the market “fear gauge” is one clear indication that risk perceptions are falling.
Indeed, there seems to be a growing consensus that the worst might be over for the equity markets. I heard one talking head on financial television explaining that many hedge funds and other “pros” are staying fully invested despite the recent turmoil in the US equity market. The main reason is that, last year, when a similar sell-off took share prices down in May and June, many of these same investors sold off risky assets. Consequently, when the market rebounded in the second half of the year, the hedge funds that sold in May and June were left underperforming the market for 2006. This time, they are staying the course. Now, naturally, one might ask if there are similarities between the stock market bottom of June and the situation before this week’s rebound?
Interestingly, many of the sentiment indicators have reached greater extremes than during the May/June market bottom. For example, put volume has been off the charts (relative to calls) and the total put to call ratio (for trading across all six US options exchanges) has been 1.00 or greater in nine of the past ten trading sessions. This ratio is a simple measure of put volume divided by call volume. When investors become anxious and begin looking to put options for portfolio protection, the put to call ratio will rise. The chart below shows the ten-day average. It has easily surpassed its May/June highs and is spiking into uncharted territory near 1.20.
Figure 1: Total Put-to-Call Ratio
In addition, it isn’t just the total put to call ratio that is reaching extremes. Other indicators hit records last week. The Trader’s Index ($TRIN) hit an all time high. The VIX posted its biggest one-day rise ever. The CBOE put-to-call ratio also set a new all-time high. The ISE Sentiment Index [ISEE] has also produced a series of low readings. The index, which measures call volume divided by put volume on the International Securities Exchange, has not rise above 1.00 since March 1. The ten-day average is below 1.00 and also below the levels seen in the summer of last year. Taken together, there is ample evidence to suggest that bearish sentiment has indeed reached levels that exceeded the previous market bottom of June 2006.
Yet, while investor sentiment is clearly very pessimistic, which is a positive from a contrary minded view of the market, there is also a risk of further bloodletting. The main reason is that the recent decline comes after a period of time when bullishness, optimism, and complacency had reached extremes. In addition, the latest decline lasted only a few days and the Dow is less than 4% from its record highs. In short, although bearish sentiment has reached an extreme, the market might not be very close to a bottom due to the mere and simple fact that it remains pretty darn close to a recent market top.
Sentiment Indicators—Past 7 Days
http://optionetics.com/market/articles/16852
Click on link above for more info. RtS
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