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Market Internals: Trading was uneventful during this latest abbreviated week of trading. US financial markets are closed Friday in honor of former United States President Ronald Reagan. Prior to the three-day weekend, Monday through Thursday, the Dow Jones Industrial Average ($INDU) rose three times and fell once to finish the week up nearly 200 points. A surge on Monday pushed the industrials up almost 150 points. After that, stocks traded mixed and the Dow made relatively little progress. By Friday, trading volumes were light and market internals were mixed with advancing issues leading declining issues by a narrow nine-to-seven margin.

The Nasdaq Composite Index (COMPQ) moved back above the 2,000 level on Monday, but struggled thereafter. Tuesday, the Nasdaq traded flat and then fell 33 points on Wednesday. Thursday, the composite index rebounded and made another attempt towards 2,000, but volume was light and market internals on the Nasdaq Stock Market were decidedly mixed. For instance, as we can see from the table above, the ratio of advancing to declining issues was dead even. Also, fittingly, the number of stocks setting new 52-week highs to the number of 52-week lows on the Nasdaq is also even, with 40 stocks setting new highs and 40 setting new lows. Basically, while the Dow managed a respectable gain on the week, the Comp Index rose only 20 points and the Nasdaq market appears to be lacking clear direction.

Sentiment Data: With stocks struggling to find direction amid light volume, investor sentiment has turned mixed—with no obvious signs of extreme bullish or bearish sentiment. The CBOE Volatility Index ($VIX) edged lower during four of five trading sessions. Consequently, the market’s so-called “fear gauge” finished the week near 15.00, which was well below last Thursday’s levels of more than 17.00. The original formula VIX ($VXO) fell below 14% and to multi-year lows this week. Meanwhile, the Nasdaq Volatility Index ($VXN) is down from nearly 24% last week to 21.23% late Thursday. The drop in the volatility barometers is a sign that options traders are becoming a bit less concerned about the outlook for the stock market going forward. Bearish sentiment is easing.

Indeed, a few other indicators suggest that bullish sentiment may be on the rise. The latest surveys of investor sentiment, for instance, showed a sharp rise in bullishness this week. According to the latest poll from the American Association of Individual Investors [AAII] bullishness among investors has skyrocketed to 55.3% from only 33.3%. Bearish sentiment plunged to only 15.8% from 26.2%. Investor’s Intelligence, meanwhile, reports that 49.5% of newsletter writers are bullish, compared to 45.1% last week. Bearish sentiment fell to 20.2% from 24.5% the week before. So, the investor sentiment surveys indicate that bearish sentiment is relatively low once again.

Not all indicators suggest that investors are becoming zealous, however. For instance, the CBOE put-to-call ratio, which measures the daily number of puts traded divided by the number of calls traded on the Chicago Board Options Exchange [CBOE], remained relatively high during the latest week of trading. In fact, it has risen above 1.00 during three of the past six trading sessions and finished on Thursday at 1.15. Historically, readings of 1.00 or more from the CBOE put-to-call ratio have coincided with high levels of bearishness among traders. The ten-day average is now .97; and down slightly from .99 last week. The ratio remains high relative to historical levels.

Overall, then, the various indicators suggest that market sentiment has turned mixed. Basically, we have moved through a period in early and mid-May that saw a sharp increase in bearish sentiment and pessimism. Since that time, market jitters have subsided and we are seeing some indicators, like the surveys of newsletter writers and the mutual fund flows (discussed last week), beginning to show rising levels of bullishness or optimism. And, this is the type of shift in market psychology that can keep investors moving into the stock market and push stocks higher still.

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