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Friday, April 23, 2004 11:22:51 PM
SENTIMENT JOURNAL: Perceptions and Reality
By Frederic Ruffy, Optionetics.com
4/23/2004 2:30:00 PM
http://www.optionetics.com/articles/article_full.asp?idNo=10278
Market Internals: The Dow Jones Industrial Average ($INDU) rose three times and fell twice to finish the week little changed. When all was said and done, the industrial average added 20 points on the week. The Nasdaq ($COMPQ) performed better. Thanks to strength in Internet, software, and biotechnology stocks, the Nasdaq managed a 55-point, or 2.8%, gain since last Friday.
Market internals were mixed during the latest week of trading. For example, although the industrial average moved higher during the past three trading sessions, by Friday, advancing issues on the New York Stock Exchange lagged declining issues nearly two to one. The New York Stock Exchange New High New Low Index also gave a bearish divergence when it fell into negative territory Friday despite the rise to new highs in the Dow. Overall, however, not much was changed since last Friday and the S&P 500 Index finished the week up just six points.
Sentiment Data: The stock market’s surge on Thursday combined with quiet trading throughout most of the week helped to push the CBOE Volatility Index ($VIX) to new multi-year lows Friday. VIX finished Friday at 14.01 and its lowest levels since August 1996. The drop in the market’s so-called “fear gauge” is somewhat troubling to the contrarian investor because it is a sign that investors seem complacent and perhaps overzealous, which is often the type of sentiment that prevails when stocks are reaching a peak and due to head south.
Yet, while the low VIX is a sign of bullishness among investors, it also reflects the relatively low levels of volatility inherent in the market today. To illustrate, the chart below plots the CBOE Volatility Index along with the actual volatility of the market during the past few years. While VIX measures the volatility reflected in S&P 500 Index ($SPX) options, statistical volatility is computed using past prices. In this case, we have plotted SPX 30-day statistical volatility (which is the annualized standard deviation of SPX closing prices during the past thirty days) along side of the VIX.
As we can see, both the VIX and the statistical volatility of the S&P 500 Index have been moving lower for several years and that trend is well in place. The actual volatility of the market hit a peak in mid-2000 when it rose above 40%. Since then, it has been in a downtrend and, despite sudden one-day rallies and sell-offs, volatility remains very low today. In fact, so far during the month of April, the average daily move in the S&P 500 Index has been only 6.6 points, or roughly .6%.
The line along the bottom of the graph shows the relationship between VIX and the actual volatility of the S&P 500. It is computed as VIX minus the SPX 30-day statistical volatility. As we can see, the line stays above zero most of the time. That is, VIX is almost always above the actual volatility of the S&P 500 Index. For instance, today, while the volatility index is near 14%, the statistical volatility of the SPX is 13%—a 1% difference. So, relative to the actual levels of market volatility, VIX is not exceptionally low.
At the same time, there is some other evidence to suggest that investor sentiment remains extremely bullish and perhaps complacent. It is not just a matter of VIX being low. For instance, according to the latest survey of investor sentiment from Investors Intelligence, 49.5% of those surveyed are bullish and only 22% are bearish. Meanwhile, the CBOE put-to-call ratio, which indicates high levels of bullishness among options traders when it falls towards .50, dipped below .70 on three different occasions this week (Friday’s closing numbers were not yet available). Finally, the Trader’s Index ($TRIN) which sends an overbought signal when it falls below .5, is once again producing low readings. It remained below 1.00 four times this week and hit an extreme low of .52 on Wednesday. The 5-Day TRIN (i.e. sum over five days), which signals overbought conditions when it falls towards 4.00, is now raising a red flag at 4.27.
http://www.optionetics.com/articles/article_full.asp?idNo=10278
By Frederic Ruffy, Optionetics.com
4/23/2004 2:30:00 PM
http://www.optionetics.com/articles/article_full.asp?idNo=10278
Market Internals: The Dow Jones Industrial Average ($INDU) rose three times and fell twice to finish the week little changed. When all was said and done, the industrial average added 20 points on the week. The Nasdaq ($COMPQ) performed better. Thanks to strength in Internet, software, and biotechnology stocks, the Nasdaq managed a 55-point, or 2.8%, gain since last Friday.
Market internals were mixed during the latest week of trading. For example, although the industrial average moved higher during the past three trading sessions, by Friday, advancing issues on the New York Stock Exchange lagged declining issues nearly two to one. The New York Stock Exchange New High New Low Index also gave a bearish divergence when it fell into negative territory Friday despite the rise to new highs in the Dow. Overall, however, not much was changed since last Friday and the S&P 500 Index finished the week up just six points.
Sentiment Data: The stock market’s surge on Thursday combined with quiet trading throughout most of the week helped to push the CBOE Volatility Index ($VIX) to new multi-year lows Friday. VIX finished Friday at 14.01 and its lowest levels since August 1996. The drop in the market’s so-called “fear gauge” is somewhat troubling to the contrarian investor because it is a sign that investors seem complacent and perhaps overzealous, which is often the type of sentiment that prevails when stocks are reaching a peak and due to head south.
Yet, while the low VIX is a sign of bullishness among investors, it also reflects the relatively low levels of volatility inherent in the market today. To illustrate, the chart below plots the CBOE Volatility Index along with the actual volatility of the market during the past few years. While VIX measures the volatility reflected in S&P 500 Index ($SPX) options, statistical volatility is computed using past prices. In this case, we have plotted SPX 30-day statistical volatility (which is the annualized standard deviation of SPX closing prices during the past thirty days) along side of the VIX.
As we can see, both the VIX and the statistical volatility of the S&P 500 Index have been moving lower for several years and that trend is well in place. The actual volatility of the market hit a peak in mid-2000 when it rose above 40%. Since then, it has been in a downtrend and, despite sudden one-day rallies and sell-offs, volatility remains very low today. In fact, so far during the month of April, the average daily move in the S&P 500 Index has been only 6.6 points, or roughly .6%.
The line along the bottom of the graph shows the relationship between VIX and the actual volatility of the S&P 500. It is computed as VIX minus the SPX 30-day statistical volatility. As we can see, the line stays above zero most of the time. That is, VIX is almost always above the actual volatility of the S&P 500 Index. For instance, today, while the volatility index is near 14%, the statistical volatility of the SPX is 13%—a 1% difference. So, relative to the actual levels of market volatility, VIX is not exceptionally low.
At the same time, there is some other evidence to suggest that investor sentiment remains extremely bullish and perhaps complacent. It is not just a matter of VIX being low. For instance, according to the latest survey of investor sentiment from Investors Intelligence, 49.5% of those surveyed are bullish and only 22% are bearish. Meanwhile, the CBOE put-to-call ratio, which indicates high levels of bullishness among options traders when it falls towards .50, dipped below .70 on three different occasions this week (Friday’s closing numbers were not yet available). Finally, the Trader’s Index ($TRIN) which sends an overbought signal when it falls below .5, is once again producing low readings. It remained below 1.00 four times this week and hit an extreme low of .52 on Wednesday. The 5-Day TRIN (i.e. sum over five days), which signals overbought conditions when it falls towards 4.00, is now raising a red flag at 4.27.
http://www.optionetics.com/articles/article_full.asp?idNo=10278
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