Market Internals: Stocks seesawed in and out of positive territory in a rather volatile week of trading. The week started out quietly enough. On Monday, the Dow Jones Industrial Average ($INDU) rose 42 points and volume, which totaled less than 1.4 billion shares, fell to low levels on the New York Stock Exchange [NYSE]. From that point forward, however, volume and volatility started to rise as investors looked to square positions at the end of the first quarter. On Tuesday, the Dow sank 80 points on heavy volume of 1.75 billion shares. A sharp rebound pushed the industrials up 135 points Wednesday. Stocks traded mixed on Thursday, and then caved in to selling pressure Friday. With one hour remaining during the first trading session in April, the Dow was down 108 points. However, despite the market’s wild gyrations this week, the industrials were down just 42 points from week ago levels.
Market internals, meanwhile, are also mixed. For example, advancing issues have trailed declining issue in five of the past eight trading sessions. On Friday, although the Dow was down 108 points, advancers trailed decliners by only a slim eight-to-seven margin. Meanwhile, the Nasdaq Composite Index ($COMPQ) is down less than ten points on the week and the Nasdaq Advance/Decline ratio was more than two-to-one positive Wednesday, almost even on Thursday, and two-to-one negative on Friday. The market action is clearly mixed and the trend seems to change from one day to the next. The choppy whipsaw trading makes short-term plays more difficult because the market seems to lack any clear direction.
Sentiment Data: The volatile trading lately has been accompanied by a slight increase in bearish sentiment, but some indicators continue to suggest that many investors remain bullish or complacent. For example, earlier this week, Bollinger’s Put Volume Indicator [PVI] fell to its lowest levels of the year. This indicator measures the day’s put volume divided by the ten-day average of put volume on the US options exchanges. For example, the table below shows the PVI for the Chicago Board Options Exchnage [CBOE]. On Monday, it fell to .54. The low reading indicates that put volume on that day was roughly half the ten-day average of put volume. In short, put activity fell to unusually low levels, which is also a sign that investors were bullish or complacent early in the week. (Please Index Intelligence: An Odd Time for Complacency for a more detailed discussion regarding the low reading from the PVI).
Similarly, the International Securities Exchange Sentiment Index [ISEE] rose to multi-month highs of 195 on Monday. The indicator measures the day’s calls purchased divided by put purchases on the International Securities Exchange [ISE], the largest US options exchange. A reading of 195 indicates almost two times as many calls were purchased on the ISE when compared to puts. Therefore, while put volume dried up on the CBOE Monday, call volume rose to relatively high levels on the International Securities Exchange. Taken together, these indicators suggest that traders in the options market were relatively complacent or bullish heading into what happened to be a volatile week of trading.
So, although there are obvious signs that investor sentiment has become more bearish during the latest market decline (please see last week’s Sentiment Journal for examples), it is probably too early to conclude that investors have capitulated or that bulls have thrown in the towel. In other words, the prevailing psychology doesn’t seem consistent with market basing conditions, yet. Instead, there are still signs that many investors remain predominantly bullish or complacent. From a contrarian view of the markets, this type of sentiment is enough reason to exercise caution because, as the market becomes more volatile, there is a chance that remaining bulls jump into the bear camp and past stock buyers become sellers.
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