Market Internals: Stocks remained under selling pressure during the latest week of trading. Although the major averages traded mixed Thursday and Friday, the tone of trading remained negative. For example, Friday, the Dow Jones Industrial Average ($INDU) added three points, but up volume trailed down volume on the New York Stock Exchange four-to-three. Total volume soared to more than 2 billion shares in Big Board trading, which is due in large part to the rebalancing of the S&P 500 Index ($SPX). Please see Tuesday’s Index Intelligence: Shaking up the S&P 500 for details of the index’s modification.
For the week, the industrial average fell three times and gave up 130 points. Most of the technical damage was down midweek, when advancers trailed decliners more than two-to-one on Tuesday and Wednesday, before stabilizing on Thursday. Sellers came out again in full force midday Friday, but despite 65-points loss in afternoon trading, the Dow was able to rally back to finish in the plus column. However, in another sign that the market is weak, the NYSE New High New Low Index plummeted from +411 two weeks ago to only +13 (with 74 stocks rising to 52-week highs and 61 falling to new lows.) The index fell into the red on Wednesday.
The Nasdaq Composite Index ($COMPQ) also fell during three of five trading sessions and gave up 37 points on the week. It fell to its lows of the year on Friday. The Nasdaq Composite found support just below the 2,000 level, and finished the day just below its previous yearly lows near 2,008.50. Market internals on the Nasdaq Stock Market were negative throughout the week, with up volume trailing down volume during the past four trading sessions. Similarly, advancers lagged decliners during the past four days. Finally, the Nasdaq New High New Low Index, which fell into the red last week, declined modestly, from –38 to –48 (with 59 stocks rising to new 52-week highs and 107 falling to new 52-week lows.)
Sentiment Data: The ongoing deterioration in the equity market is causing a noticeable uptick in hedging. The most obvious example is on the Chicago Board Options Exchange [CBOE] where the put-to-call ratio has risen above 1.00 during four of the past five trading sessions. When this ratio rises above 1.00, it indicates that more puts traded on the CBOE when compared to calls. The last time there were so many high readings from this indicator was in October of last year, which also happened to be an important market bottom. Therefore, from a contrarian view, the spike in the CBOE put-to-call ratio is a bullish sign. It indicates that investors might have overreacted and that stocks are oversold.
However, while the CBOE put-to-call ratio has spiked to its highest levels since the last important market bottom, it might be too early to conclude that investors have capitulated. For one, the recent readings might have been somewhat distorted by this week’s option expiration. In addition, other indicators are not pointing to extreme bearishness. For example, the CBOE Volatility Index ($VIX) is not far from where it was one week ago. It rose from 12.80 to 13.15. When the market bottomed in October, the market’s so-called fear gauge was near 17.00.
Meanwhile, the total put-to-call ratio is not recording high readings. While the CBOE put-to-call ratio considers the activity on the Chicago Board Options Exchange, the total put-to-call ratio measures the action across all six US options exchanges. The chart below shows the ten-day average. Notice that in October, the ratio approached .9. As of Thursday, it was reading .79.
Finally, the latest surveys of investor attitudes are not consistent with capitulation. For example, the most widely watched survey by Investors Intelligence shows 54.5% bullish and only 24.3% bearish. The American Association of Individual Investors reports an equal amount of bullish and bearish sentiment—i.e. 32.47%. So, as we noted here last week, the risk is that the market is beginning to see a long-term shift in market sentiment, as the pendulum begins to swing away from high levels of bullishness and complacency, and to rising levels of bearishness or pessimism. If so, the table might be set for a more significant market move to the downside as investors become more cautious and continue to sell shares.
Frederic Ruffy Senior Writer & Index Strategist Optionetics.com ~ Your Options Education Site
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