Market Internals: Stocks moved broadly lower during the latest week of trading. The Dow Jones Industrial Average ($INDU) fell three times, rose twice, and gave up roughly 210 points. Volume was relatively light and market internals on the New York Stock Exchange [NYSE] were mixed. In fact, on Wednesday, although the Dow plunged nearly 100 points, the ratio of advancing to declining issues was net positive. In addition, while the industrial average lost 210 points on the week, the NYSE New High-New Low Index improved from +95 to +103 (with 108 stocks setting new 52-week highs and only five stocks setting new 52-week lows). Therefore, the large drop in the Dow may have exaggerated the true weakness in the market.
The Nasdaq Composite Index ($COMPQ) also moved lower, but the decline was rather modest. At the end of the week, the Nasdaq was twenty points below last Friday’s levels. The 1.2% decline occurred on rather light volume. Market internals on the Nasdaq Stock Market held up well and the advance-decline line improved during three of five trading sessions. In addition, the Nasdaq New High-New Low Index also improved during the latest week—from +114 to +141. For the week, losses in networking, semiconductor, and biotech stocks were partially offset by strength in shares of storage device and Internet companies.
Sentiment Data: Although market internals held up relatively well during the latest week of trading, the situation continues to urge caution. Specifically, the strong market action witnessed in early June (which included sharply rising stock prices, heavy volume, positive market internals, and increasing bullish sentiment) has given way to mixed and lackluster trading. Volume is falling, the ratio of up to down volume is more often negative rather than positive, and the major averages like the Dow (below 9,000) are finding it harder to hold key support levels.
In the face of deteriorating market conditions, bullish sentiment remains high and consistent with the type of market psychology that often accompanies market tops. For one, the CBOE Volatility Index ($VIX) is moving up from twelve-month lows. Generally, when the market’s so-called “fear gauge” rises from low levels, the path of least resistance for stocks is to the downside. Meanwhile, the CBOE put-to-call ratio has been falling—which suggests relatively high levels of call (relative to put) activity. This week, the ten-day moving average of this ratio fell to .64 and its lowest reading since November 2001. In addition, the recent surveys of investor sentiment are showing extremely high levels of bullish sentiment. This week, Investors Intelligence reports that 59.4% of newsletter writers are bullish and only 17.7% are bearish. Even more striking, the American Association of Individual Investors survey of investor sentiment shows 71.43% bullish and only 8.57% bearish.
From a contrarian perspective, the evidence of extreme levels of bullish sentiment in the market is reason to be cautious. It is a sign that investors are piling up on one side of the market. Eventually, the cycle will change and the bulls will turn to bears, and buyers will become sellers. In the face of deteriorating market internals, that transition may already be underway. For that reason, it is wise to treat the latest rally with caution, hedge upside bets, look for opportunities to profit from a move to the downside, and make wise money management decisions.
Without a doubt, airline stocks have been the month’s top performers with one day left to trade in the month of June. Way overbought and MACD not confirming recent high. Look for test of trendline support.
The Japan index is among the month’s best gainers. Is the long-awaited end to the bear market at hand! It might be early to tell. A break above 100 is a bullish first sign.
Gold stocks outperform the broader market in June. XAU appears to be faltering, however, and unable to break major resistance at the 83 level.
Small caps are among the best gainers during the month of June, but even their gains are modest. RUT is holding trendline support and has significant resistance at the 460 level. A drop below 440 is bearish.
Networking stocks weigh down the tech sector in June. NWX is testing trendline support that developed from the October 2002 lows. Await break above 200 before adding positions to the upside.
Oil service stocks are still weak and MGO is testing support between 70 and 71. MACD looks ominous.
Chip stocks are the month’s worst performers. SOX is often a leading indicator for the tech sector and it’s recent decline is not a favorable development. Watch for trendline failure and head for the hills Jethro
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