Optionetics.com - SENTIMENT JOURNAL: Bears Regain the Helm Amid Rising Pessimism, Frederic Ruffy
Friday January 24, 7:30 pm ET
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Market Internals: Stocks remained volatile during the latest holiday-abbreviated trading week. Although markets were closed on Monday in recognition of the Martin Luther King holiday, the Dow Jones Industrial Average (^DJI) still suffered sizeable losses. The Dow fell during three of four trading sessions and tumbled 456 points. In addition, the industrial average has fallen during six of seven trading sessions and suffered a 711-point decline in the process. The slide in the Dow is now being accompanied by deteriorating market internals. On Friday, when the industrials plunged 240 points, declining issues outpaced advancing issues on the New York Stock Exchange [NYSE] three-to-one and the ratio of up-to-down volume was five-to-one negative. Ouch.
While NYSE trading has turned ugly, the same story is being t daq Stock Market. The Nasdaq Composite Index (^IXIC) fell during three of four trading sessions in the latest trading week on increasing volume. The damage was not as extensive, however. At the end of the week, the composite index had given up only 34 points, or 2.5%. While semiconductor and biotechnology stocks took it on the chin, networking, fiber optic, and software stocks held up relatively well.
Sentiment Data: As the most recent trading week unfolded, our suspicions from last week were confirmed without question. Specifically, we noted that, “there are a few reasons to believe that the trend for stocks may be shifting back down. First, market internals deteriorated dramatically last week. As noted earlier, from Wednesday through Friday, market internals (especially on the Nasdaq) were awful. In addition, and more importantly, there is evidence that market sentiment is becoming negative or bearish once again. If that trend continues, it is unlikely that buyers will return to the market to drive up stock prices. If so, that will likely to remain the case until bearish sentiment has once again reached an extreme-and investors have capitulated once again.”
Now we are seeing the bearish barometers increase once again. There has been a sharp rise in the market's so-called “fear gauge”-the CBOE Volatility Index (^VIX). VIX has jumped up to 36%, compared to 27% two weeks ago. Meanwhile, NYSE TICK (^TIC.N) suggests that selling pressure is increasing. On Friday, TICK hit investors are selling into the market decline. Additionally, the latest investors survey by the American Association of Individual Investors [AAII] now shows only 25% bullish and 43% bearish, compared to 29% and 29% the week before. Finally, gold has been on fire! The precious metal is often used as a hedge during periods of fear and panic. Therefore, its recent ascent suggests that investors are indeed growing more anxious.
Given that the Dow Jones Industrial broke its three-month trading range on Friday, market internals are once again simply awful, and the sentiment indicators are pointing to rising levels of bearish sentiment, it appears that the market may be on another path towards capitulation. That is, stocks are likely to continue falling until bearish sentiment has reached another extreme and investors have coughed up stocks, en masse, out of pure disgust. We have seen this happen numerous times during the latest bear market-in July and October 2002, in September 2001, and April 2000. Numerous periods of capitulation during one bear market is not unprecedented. Indeed, during the market decline from 1929 until 1932 there were five episodes of capitulation. In the current market, all of these periods of capitulation pave the way for a rally. Furthermore, eventually, an episode of capitulation will set the table for the next bull market. When that will happen is anybody's guess.
Nevertheless, the contrarian will be watching the market going forward and looking for signs that investors are throwing in the towel once again and that bearish sentiment has once again run its course. We are not there yet. For example, Investors Intelligence still reports that 50% of those surveyed are bullish on the market and only 28.3% are bearish. In addition, the key CBOE put-to-call ratio has not been producing readings consistent with extreme levels of bear ator, which triggers buy signals above 1.00 and sell signals below .50, stayed between .53 and .83 during the past four trading sessions. The relatively low readings from the put-to-call ratio do not suggest that investors have turned bearish. Finally, the recently reliable Put Volume Indicator [PVI] has not produced any readings consistent with extreme bearishness or market-basing conditions lately. In fact, it remained between .77 and .93 during the latest week. In a period of capitulation, PVI is more likely to move closer to 2.00, which would suggest two times greater than normal put activity. |
