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SENTIMENT JOURNAL: Fear Turns to Greed
By Frederic Ruffy, Optionetics.com
4/9/2004 10:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10208

Market Internals: Stocks traded relatively quietly to finish an abbreviated week of trading almost unchanged. The Dow Jones Industrial Average ($INDU) rose twice and fell twice to finish 38 points lower. US financial markets are closed Friday in observance of Good Friday. For the week, internals were mixed, but deteriorated as trading progressed. Up volume lagged down volume Tuesday through Thursday. Similarly the ratio of advancing to declining issues was negative during four trading sessions. By Thursday, the ratio was almost two-to-one negative. Meanwhile, the NYSE New High-New Low Index slipped from +305 to +133 (with 154 stocks setting new 52-week highs and only 22 setting new 52-week lows.)

The Nasdaq Composite Index ($COMPQ) rose two times and fell twice to finish the week down less than five points. Market internals were mixed, but positive overall. The ratio of up to down volume, for instance, stayed positive during three of the week’s four trading sessions. Internet stocks helped keep the Nasdaq steady, but weakness in biotechnology, semiconductor, and computer stocks kept a lid on any advance. Overall, trading was quiet and daily Nasdaq volume remained below 1.8 billion shares during every trading day this week.

Sentiment Data: As one might expect, the short and uneventful week of trading did little to change market sentiment. Overall, it appears that, after a brief episode of bearishness, pessimism, and even fear during mid-March, investors are once again bullish towards the outlook for stocks. For instance, Investors Intelligence survey reports that 48.5% are bullish and only 22.8% are bearish. Similarly, the American Association of Individual Investors [AAII] survey now reads 58.8% bullish and only 20.3% bearish.

The CBOE Volatility Index ($VIX) fell to low levels earlier this week. On Monday, the market’s “fear gauge” fell below 15 for the first time in nearly a month. At the same time, the Nasdaq QQQ Volatility Index ($QQV) has fallen to new all-time lows. This index measures the implied volatility of the actively traded Nasdaq 100 Index options. The recent drop indicates that traders expect volatility in the technology sector to remain low going forward, which would only happen if sentiment is bullish and perhaps complacent.

Elsewhere in the options market, trading activity also suggests investors remain optimistic. The CBOE put-to-call ratio finished the week at .74 and squarely in neutral territory. This indicator flashes a warning signal when it drops below .50 and triggers a bullish alert when it moves above 1.00. The ratio failed to trigger any alerts in the latest week of trading. However, the International Securities Exchange Sentiment Index [ISEE] rose to high levels earlier this week. On Tuesday, the index rose to 252 and its highest level since January 2004. The high reading indicates that there was 2.5 times more call than put purchases on the largest US stock options exchanges. The heavy call buying, in turn, is another sign that the extreme bearish sentiment that hit the market in mid-March has dissipated, and paved the way for another period of time characterized by optimism, bullishness, and perhaps even greed.