Sector Investing

[ReturntoSender]

SENTIMENT JOURNAL: Listless Trading Leaves Sentiment Unchanged
By Frederic Ruffy, Optionetics.com
5/21/2004 5:30:00 PM

http://www.optionetics.com/articles/article_full.asp?idNo=10440

Market Internals: Volume was light and volatility fell during the latest week of trading. The Dow Jones Industrial Average ($INDU) lost ground three times, rose twice, and lost roughly 55 points. Overall, the daily point moves have not been substantial. During the five of the past seven trading sessions, the Dow has moved thirty-five points or less. The small daily point moves have been accompanied by mixed trading. For instance, on Wednesday and Thursday, the ratio of up to down volume on the New York Stock Exchange [NYSE] was almost even. During that time, advancing issues outpaced declining issues by a small margin.

By Friday, internals on the Big Board had turned net positive, with advancing issues beat declining issues two-to-one and the ratio to up to down volume was also two-to-one positive. On another positive note, the New York Stock Exchange New High New Low Index, which fell to an extreme low of –853 less than two weeks ago, has recovered. The index is now only marginally negative at –5 (with 24 stocks setting new 52-week highs on the NYSE, compared to 39 stocks setting new lows). However, total volume has been light, as less than 1.3 billion shares traded on option expiration Friday.

For the third consecutive week, the Nasdaq Composite Index (COMPQ) performed better than the Dow. It rose during four of the past five trading sessions. Market internals on the Nasdaq Stock Market were mixed throughout most of the week, as gains in some groups offset losses in others. Consequently, as we can see from the table above, the Nasdaq moved less than one point on two occasions and made little progress throughout the course of the week. It rose just 8 points above last Friday’s levels and finished the week just above the 1,900 mark.

Sentiment Data: The mixed and listless trading during the past few days did little to alter the overall sentiment picture. Last week, we noted that bearish sentiment and pessimism had risen dramatically over the course of just a few weeks. That still remains the case today. So, although volume has been light and market volatility has been low, anxiety levels and bearishness remain relatively high. For instance, CBOE Volatility Index ($VIX), which fell to a multi-year low of 14.01 one month ago, was unchanged on the week. The market’s so-called “fear gauge” now reads 18.49 and is therefore near the upper end of this year’s trading range.

The CBOE put-to-call ratio also remained high during the latest week of trading. The ratio, which is computed as the number puts traded daily on the Chicago Board Options Exchange [CBOE] divided by the number of calls, averaged 1.02 during the latest week of trading. By way of comparison, the ratio averaged only .63 during the same period last year (week ended May 16, 2003). The high readings from this indicator suggest that put volume remains high, relative to calls, and that in turn is a sign of rising levels of bearish sentiment.

The latest surveys of newsletter writers also point to falling levels of bullishness. According to the latest poll from Investor’s Intelligence, 43.6% of newsletter writers are bearish, compared to 44.6% last week. Bearish sentiment increased to 26.7% from 25.7% the week before. The American Association of Individual Investors [AAII] survey now has bearish sentiment at 40% and bullish sentiment of only 36.7%.

Mutual fund investors have also turned a bit more cautious. According to AMG Data, mutual fund investors withdrew $626 million from stock mutual funds during the week ended May 19. Last week, outflows from stock funds totaled $2.4 billion. In addition, mutual funds have now experienced outflows during three consecutive weeks. These numbers, like many of the other sentiment indicators, suggest that bearish sentiment has increased notably during the past few weeks—and this is the type of shift in market sentiment that often sets the table for the market’s next major rally.