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SENTIMENT JOURNAL: Time to Jump Ship?
By Frederic Ruffy, Optionetics.com
4/16/2004 9:30:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10242

Market Internals: Although the Dow Jones Industrial Average ($INDU) snapped its losing streak on Thursday, the technical action of the market has turned decidedly bearish. Advancing issues have now trailed declining issues during seven of the past eight trading sessions. Even on Monday, when the Dow added 73.5 points, the ratio of advancing to declining issues was only even. On Tuesday, when the industrial average plummeted 134 points, the ratio was more than seven-to-one negative! Ouch. Meanwhile, up volume has trailed down volume during seven of the past eight trading sessions. The New York Stock Exchange New High New Low Index is also pointing to market weakness. The index dipped into negative territory on Wednesday, when 224 stocks set new 52-week lows on the New York Stock Exchange and only 36 set new highs.

The Nasdaq Composite Index ($COMPQ), meanwhile, has fallen during the past three trading sessions (through Thursday, April 15, 2004) and is now revisiting the technically significant 2,000 level. Market internals are also deteriorating on the Nasdaq Stock Market. For one, total trading volume is clearly accelerating on the down days and there has been no contest between up and down volume since Monday. For example, on Thursday, as the Nasdaq fell 22.7 points, the ratio of up to down volume was four to one negative. Nasdaq advancing issues have trailed declining issues during four of the past five trading sessions.

Sentiment Data: The recent deterioration in market internals appears to have stirred up very little angst or bearishness. Instead, most of the sentiment indicators continue to suggest that investors are predominantly bullish or upbeat about the stock market. For instance, Investors Intelligence survey now reports that 50% are bullish and only 22% are bearish. Similarly, the American Association of Individual Investors [AAII] survey is now extremely lopsided, with (hold on to your hats) 63.8% bullish and only 13.8% bearish.

Meanwhile, the CBOE Volatility Index ($VIX) remains at low levels. As of Thursday afternoon, the CBOE Volatility index was down .50 points on the week. The drop in the market’s so-called “fear gauge” is somewhat unusual given that both the Dow and the Nasdaq are also down on the week. Normally, VIX moves higher when stocks fall. However, the index’s recent decline might be a sign that many investors believe the recent deterioration in the technical action of the stock market will be short-lived; and then perhaps followed by a return to more normal, less volatile, trading.

Elsewhere in the options market, traders are showing a few signs of caution. For example, the CBOE put-to-call ratio jumped up to .92 on Tuesday. Readings above 1.00 from this indicator suggest relatively high levels of bearish sentiment. Values of .50 or less are often indicative of excessive bullishness or optimism from options traders. The ten-day average of this ratio is now .75, and therefore perfectly neutral.

Overall, then, judging from the collective readings from the sentiment data, it appears that the majority of investors remain upbeat or optimistic despite the market’s recent slide. However, as we noted during the first two paragraphs, market internals are deteriorating significantly and the technical outlook has turned somewhat bearish. For that reason, the high level of bullishness reflected in the sentiment data is perhaps a red flag. It is possibly a sign that investors are too optimistic: and that stocks will continue to fall as a greater number of bulls jump ship and sign on with the bears.