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SENTIMENT JOURNAL: The Bulls are Back
By Frederic Ruffy, Optionetics.com
4/2/2004 11:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10175

Market Internals: After a volatile month of March, the stock market appears to be moving into the month of April on solid footing. While the Dow Jones Industrial Average ($INDU) has risen during four of this week’s five trading sessions (through midday Friday), market internals on the New York Stock Exchange [NYSE] have become quite strong. For example, as we can see from the table above, there has been no contest between advancing and declining issues in the last four days. Similarly, the ratio of up to down volume on the NYSE has been positive during the past six trading days. Finally, the NYSE New High-New Low Index, which fell to +42 in mid March, finished the day Thursday reading +305 (with 313 stocks setting new 52-week highs and only 8 setting new 52-week lows).

Meanwhile, the Nasdaq Composite Index ($COMPQ) is also moving higher. If Friday’s early gains hold, the index is up during four of this week’s five trading sessions. The Nasdaq advance-decline line, meanwhile, has improved during the past seven trading sessions. At the same time, the Nasdaq New High New Low Index also improved dramatically during the past two weeks. The index, which measures the number of 52-week highs minus the number of 52-week lows on the Nasdaq Stock Market, almost dipped into negative territory two weeks ago when only 40 stocks set new highs and 39 stocks fell to new 52-week lows. However, by Thursday of this week, the index was up to +165 (with 180 new highs and 15 new lows).

Sentiment Data: Bullish sentiment among investors continues to rise along with stock prices. For instance, the CBOE Volatility Index ($VIX) has moved lower during eight of the past nine trading sessions (including early Friday). After closing at a five-month high of 21.58 on March 22, the market’s so called “fear gauge” dropped below 16 on Friday. Similarly, the Nasdaq Volatility Index ($VXN), which spiked above 27 roughly two weeks ago, is once again below 22. The drop in the two volatility barometers continues to suggest that anxiety levels are easing and bullish sentiment is creeping back into the market.

The investor sentiment surveys are showing clear evidence that bullishness and confidence is once again raising. The Investors Intelligence survey reports that 46% are bullish, compared to 45.4% a week ago, and bearish sentiment has edged up to 25.0% from 23.2% bearish. Meanwhile, the American Association of Individual Investors [AAII] survey showed a sharp shift in sentiment during the latest week. According to the latest survey, 55.2% are bullish, compared to 31.5% last week, and bearish sentiment has fallen from 42.6% to only 22.4%.

In the options market, traders have been showing rising levels of bullishness. Not only has VIX fallen, but also the CBOE put-to-call ratio has reverted back to low levels. The ratio, which rises when investors become nervous and buy high levels of puts relative to calls, fell to only .61 on Thursday, which was its second lowest reading of the year. Meanwhile, the CBOE index put-to-call ratio is also moving lower. The ratio, which indicates that bullish sentiment is quite high when it dips below 1.00, fell to 1.11 on Thursday and to one of its lowest readings of the year. Taken together, the drop in the put to call ratios, the decline in VIX, and the latest surveys of investor sentiment, indicate that the bearishness and anxiety that surfaced throughout the stock market in mid-March has dissipated; paving the way for another market rally fueled by rising bullishness and confidence among investors.