SENTIMENT JOURNAL: Bulls Battle Back By Frederic Ruffy, Optionetics.com 6/25/2004 2:30:00 PM
Market Internals: Stocks traded mixed in the latest week and made no significant progress one way or another. In fact, after moving higher two times and falling on three occasions, the Dow Jones Industrial Average ($INDU) finished the week down 44 points. Yet, despite the modest loss in the Dow, stocks held well and market internals on the New York Stock Exchange [NYSE] were net positive. For instance, although the industrial average rose only two times, the ratio of advancing issues to declining issues was positive during four of five trading sessions—including on Friday when the industrials tumbled more than 70 points. Also, the NYSE New High New Low Index [NHNL] also improved throughout the week. In fact, even as the Dow fell 36 points on Thursday, the index rose to +182 (with 205 stocks setting new 52-week highs and only 23 falling to new 52-week lows).
The Nasdaq Composite Index (COMPQ) performed a bit better than the Dow. Thanks to gains on Tuesday, Wednesday, and Friday, the Nasdaq was able to gain 65 points, or 3.3%. In the process, the Nasdaq was able to recapture the 2,000 mark. Market internals on the Nasdaq Stock Market also improved. The ratio of advancing to declining issues has been positive during four of five trading sessions. On Friday, as the Nasdaq traded higher, total volume approached 2 billion shares in Nasdaq trading and up volume trounced down volume two-to-one. Meanwhile, the Nasdaq NHNL improved. It rose from only +1 last week to +85 Friday (with 170 Nasdaq stocks setting new 52-week highs and only 85 setting new lows).
Sentiment Data: The market’s slow and steady advance during the past few weeks has instilled a renewed sense of bullishness among investors. So far this month, the Dow Jones Industrial Average ($INDU) is up 191 points, but has experienced average daily moves of only 50 points, or less than .5%. The largest move occurred on June 7 when the industrial average rose nearly 150 points. Outside of that, the Dow has moved 75 points or more on only two occasions. Meanwhile, the S&P 500 Index ($SPX) has had average daily moves of 5.9 points, or .52%, and the average move in the Nasdaq ($COMPQ) has been 16.11 points or .86%. All three averages are in positive territory for the month.
The market’s slow and steady advance so far in June 2004 has helped alter risk perceptions and the volatility indexes are falling to new lows. The CBOE Volatility Index ($VIX) fell to its lowest levels since August 1996 earlier this week when it closed below 14%. The Nasdaq Volatility Index ($VXN) dipped to new all-time lows. Basically, as the major averages have moved higher since mid-May, these two indices have moved sharply lower. The chart below shows the one-year trend.
Source: OptionGear
While the low reading from the VIX reflects the quiet trading during the past few months, the drop in the market's so-called "fear gauge" is also a sign that investors are becoming bullish. Other indicators confirm this trend. For instance, the latest surveys of investor sentiment report high levels of bullishness. According to Investor's Intelligence, 54.6% of those polled are bullish and only 18.6% are bearish. Meanwhile, the ratio of put to call activity is declining. The American Association of Individual Investors [AAII] reports that 56.41% are bullish and only 23.08% are bearish.
In the options market, it appears that traders are also turning a bit more optimistic. As evidence, call activity is increasing and put-to-call ratios are falling. For instance, on Thursday, 1.67 million puts traded across the six US options exchanges, and 2.46 million calls. The total put-to-call ratio subsequently fell to .68 and its second lowest levels of the month. The ten-day average, meanwhile, dipped to .74 and to levels not seen since early May.
So, on the one hand, the new low in the VIX this week is due to the quiet trading in the market during the past month. On the other hand, the low readings from the "fear gauge" also reflect high levels of bullish sentiment. Other indicators such as surveys of newsletter writers and put-to-call ratios confirm that the bulls have battled back. Furthermore, the rise in optimism is somewhat surprising. That is, it is not the type of market psychology that one might expect to see ahead of key events like the Fed meeting on interest rates as well as the transfer of power in Iraq next week.
Frederic Ruffy Senior Writer & Index Strategist Optionetics.com ~ Your Options Education Site Visit Fred Ruffy’s Forum
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