Market Internals: Stocks moved lower during the first week of trading in May 2004. The Dow Jones Industrial Average ($INDU) fell in three of five trading sessions and gave up 108 points, or roughly 1%. Yet, although the loss in the Dow was relatively modest, market internals on the New York Stock Exchange [NYSE] deteriorated significantly during the last few days. For instance, on Friday, down volume overwhelmed up volume by a ratio of eight-to-one on the NYSE. Similarly, the ratio of advancing to declining issues was more than twelve-to-one negative! The number of stocks setting 52-week lows swelled. Last Friday, 129 stocks set new lows on the NYSE, compared to 29 new highs. This week, more than 700 set new 52-week lows and only 27 new highs.
While the Nasdaq Composite Index (COMPQ) also lost ground for the week, it performed better than the Dow. In fact, the Nasdaq is down only two points since last Friday. However, market internals on the Nasdaq Stock Market also deteriorated as the trading week progressed. By Friday, up volume trailed down volume two-to-one and the ratio of advancing to declining issues was nearly three-to-one negative. Overall, Nasdaq stocks seemed to hold up relatively well given the intense selling taking place on the NYSE Thursday and Friday.
Sentiment Data: Falling stock prices during the past few weeks has caused a noticeable rise in market angst. The recent increase in the CBOE Volatility Index ($VIX) is one of the most visible signs. After falling to eight-year lows of 14.01 on Friday, April 23, the index has been headed higher. Friday, as stocks plunged, the index rose 1.08 to 18.13. The rise in the market's so-called "fear gauge" indicates that investors and traders are becoming a bit more a cautious. Market angst is increasing. In fact, this shift in sentiment has been noticeable in a number of other indicators:
1) The latest surveys of sentiment conducted by Investors Intelligence and the American Association of Individual Investors [AAII] indicate that bullish sentiment is falling. According to the latest poll from Investors Intelligence, 46.4% of those surveyed are bullish, down from 50% last week. 23.7% are bearish, compared to 22.4% the week before. At the same time, AAII reports that bullish sentiment has fallen from 50% to 39% in the latest week; and the number of bears in its survey has risen to 27.1% from 21.2%.
2) Fund flows turned negative. According to AMG Data, $14 million moved out of stock funds in the latest week (ended May 5), compared to inflows of $1.6 billion the week before. While the withdrawals are not yet extreme, the outflows put an end to a long period of mutual fund inflows. So, the latest outflows from stock funds is another sign that investors are turning a bit more cautious.
3) The CBOE put-to-call ratio is on the rise. The indicator, which measures the daily call verses put volume on the Chicago Board Options Exchange [CBOE] rose to 1.26 on Thursday, and its highest levels since March 31. The ten-day average of this ratio is now .89, compared to .78 one week ago. Therefore, the CBOE put to call ratio is clearly pointing to greater bearishness or angst, as the ratio of puts to calls traded daily has been on the rise.
4) The International Securities Sentiment Index [ISEE] rose above 200 three times last week. Readings above 200 indicate two times more call than put buying on the International Securities Exchange [ISE], the largest US stock options exchange. This week, the index has remained below 200 and fell to a low of 136 on Wednesday. In short, the drop in the ISEE indicates that traders are buying fewer calls, relative to puts, and this is also a sign that bullish sentiment is falling.
5) NYSE TICK ($TICK) has been recording extreme negative readings. Friday morning, the index, which measures upticks minus downticks on the New York Stock Exchange plunged to -1,469. TICK rarely falls below -1,100. So, Friday's extreme reading is a sign of intensive selling pressure, as the number of downticks greatly exceeded upticks. This appeared to be panic type selling.
Overall, the recent rise in VIX along with a host of other indicators does indeed suggest that market anxiety levels and bearish sentiment are climbing higher. The mood on Wall Street is shifting. As a result, stocks are finding it more difficult to advance because there are fewer and fewer bulls willing to "buy the dips." Sellers are dominating trading and volatility is on the rise. Furthermore, this can continue for some time until 1) a catalyst [earnings, economic, geopolitical, etc.] arises that brings buyers back into the market or 2) the stock market gets washed out when bearish sentiment reaches an extreme and investors eventually capitulate. So far, neither of these events seems to be happening.
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