Market Internals: Stocks finished a volatile week of trading modestly higher. The Dow Jones Industrial Average ($INDU), which was able to bounce back from a triple digit loss Friday afternoon, gained 77 points on the week. On the positive side, the Dow was able to hold the 10,000 level on Wednesday and surge 200 points Thursday. In a less bullish sign, there was not follow through on Friday. Instead, the Dow tumbled more than 150 points in afternoon trading, before bouncing higher into the close. In all, it was a week that saw a heavy volume, volatility, and lots of ups and downs; but in the end, not much had really changed. The Dow rose less than 1%.
A similar story was told over on the Nasdaq Stock Market. The Nasdaq Composite Index ($COMPQ) moved higher during three of five trading sessions and finished the week 25 points higher. A 48-point surge pushed the Nasdaq sharply higher Thursday, but a large chunk of that was erased due to a 30-point loss Friday. Volume was heavy throughout the week and market internals were mixed. For example, the ratio of advancing to declining issues in Nasdaq trading was negative two times, positive twice, and almost dead even on Monday. Clearly, the bulls and bears are battling for control of the market and it has become increasingly difficult to tell which group will win from one day to the next.
Sentiment Data: The stock market slide that started on Wednesday April 13th caused a noticeable shift in market psychology. As we noted here last week, there were visible signs that bearish sentiment was on the rise and also convincing signs that “investors did panic.” A surge in stock and options volume offered compelling evidence. Total put volume on Friday, for example, hit a record 6.1 million contracts. Meanwhile, key put-to-call ratios spiked and the CBOE Volatility Index ($VIX) rose to its highest levels since August 2004. All indications pointed to high levels of bearish sentiment, and maybe even panic selling.
Yet, while the evidence did hint at capitulation, we concluded that it might be too early to call a market bottom or to assume that stocks had been completely washed out. Instead, it was noted that the rise in bearish sentiment had been a relatively recent development. Normally, capitulation would occur at the end of a period of falling stock prices. In this case, however, the S&P 500 Index ($SPX) was setting new 3-year highs less than two months ago.
The setting is a bit changed in the latest week of trading. Although market volatility is clearly on the rise, overall market sentiment is now mixed—and not at a bearish extreme. For example, the latest surveys of investor sentiment from Investors Intelligence show 48.4% bullish and only 26.9% bearish. At 15.44%, the VIX is well above its recent lows near 11.3%, but also a far cry from the highs roughly one year ago of 21.3%. The VIX certainly has room to move higher given the recent increase in actual market volatility.
Meanwhile, the panic put buying that we saw last week has subsided. As a result, Bollinger’s Put Volume Indicator [PVI], which spiked to more than 2.00 last week, averaged .80 during the past four trading sessions and fell to its lowest levels of the month on Friday. The PVI indicator measures the day’s put volume divided by the ten-day average of put volume. When it falls, it indicates that relative levels of put buying, and hence defensive activity or hedging, are also declining. (See the table below for the latest readings from the PVI).
In conclusion, the extreme levels of bearishness and angst seen last Friday eased this week and sentiment now seems mixed. In this situation, we generally defer to the technical action of the market, which appears to be deteriorating somewhat, or to the fundamentals, which seem somewhat precarious given the earnings deceleration, the spike in crude oil, the Fed rate hikes, etc. In addition, given the roller coaster ride in the market lately, making short-term market calls has proved to be a tough nut to crack. As a result, it might make sense to focus more on longer-term trends and individual stocks or sectors rather than trying to predict the next short-term move in the market as a whole.
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