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SENTIMENT JOURNAL: Reasons To Be Bullish, Frederic Ruffy
Friday October 11, 9:30 pm ET
biz.yahoo.com
Market Internals: After six consecutive weekly losses, the Dow Jones Industrial Average (^DJI) was able to add 325 points, or a little more than 4% for the week. The gains were thanks to a two-day 560-point surge that began Thursday morning. Some traders made note of the bullish action on Thursday, which might be consistent with a major reversal. Specifically, after falling to new 5-year lows, the Dow finished the trading session at its highest levels for the day, and that was also above the previous day's close. This type of reversal is rare and generally bodes well for stock market rally from that point forward. In fact, by Friday, investors appeared convinced that a reversal is forthcoming. The industrial average surged more than 300 points and up-volume topped down volume nearly 9-to-1. The New High-New Low Index also made a noticeable improvement. The index tumbled to –589 on Wednesday (608 new lows and only 19 new highs), but was only –53 on Friday. (For more on the recent activity of the New High-New Low Index please visit the article Index Intelligence: NHNL-New High-New Low Index Gives Bullish Divergence at Optionetics.com).
The Nasdaq Composite Index (^IXIC) also staged a late-week rally that took the index 70 points, or 6%, higher for the week. Market internals improved as trad , up-to-down volume was nearly three-to-one negative, by Wednesday it was even, and on Friday, the ratio was more than four-to-one positive. Total volume also increased with each rally. However, the ratio of advancing-to-declining issues on the Nasdaq Stock Market was negative during three of five trading sessions. On Wednesday, it was almost three-to-one negative. Nevertheless, strength in Internet, software, hardware, and semiconductor stocks helped power the technology sector sharply higher for the week.
Sentiment Data: According to contrarians, bull markets start when the majority of investors are bearish. Sometimes the word capitulation is tossed around. The term describes a situation when investors have weathered a bear market and become so thoroughly dismayed with stock ownership that they sell off any remaining stock holdings in disgust. When the mass of investors does this collectively, the stock market gets sold out. In other words, sellers have been washed out of the market and all that remains are buyers. Of course, this type of capitulation occurs during periods of extreme investor dismay, fear, and sometimes panic. Contrarians say that these episodes of capitulation also pave the way for a bull market. Therefore, signs of extreme investor bearishness are considered a market positive from the contrarian approach and, for that reason, the latest readings from the sentiment data are reasons to be bullish.
The CBOE put-to-call ratio, which measures put and call activity on the Chicago Board Options Exchange, has returned to high levels. The indicator gives market buy signals above 1.00 and sell signals below .50. On Monday, it hit 1.04. In addition, it remained at a relatively high level (between .90 and .97) during the remainder of the week. Therefore, the CBOE put-to-call ratio has been consistent with high levels of bearish senti ndex put-to-call ratio, which gives buy signals above 2.00 and sell signals below 1.00, has been in a neutral range of 1.26 to 1.73. However, index put volume on the Chicago Board Options Exchange was more than 320,000 contracts on Thursday and Friday. Such high levels of index put volume are rare. In fact, in the week of trading following the terrorist attacks of September 11, 2001, index put volume topped 300,000 contracts on only one occasion. Therefore, relative to past market bottoms, heavy put volume over the past few days signal high levels of investor pessimism.
The investor sentiment polls are showing extremely low levels of bullishness among investors. Investor's Intelligence, for example, shows only 31% bullish, compared to 38% the week before. Market Vane reports only 29% bulls. Meanwhile, bullish sentiment as measured by the American Association of Individual Investors [AAII] plummeted to 28.8% compared to 35.2% and bears surged to a yearly high of 54.8% from 47.9% the week before. Therefore, the latest surveys of investor sentiment are consistent with the type of psychology one might expect at a major market bottom.
Another sign that investors are throwing out stocks in sheer panic are the recent readings from NYSE TICK (^TIC.N). This indicator, which measures upticks minus downticks on the New York Stock Exchange, produces extreme positive readings when investors are chasing stocks higher and extreme negative readings when investors are selling into market declines. TICK produced a series of extreme negative readings this week (-1,118 on Monday, -1,107 on Tuesday, -1,301 on Wednesday, and –1,230 on Thursday). Consecutive extreme negative numbers such as this have been fairly rare during the recent bear market and suggest that investors are growing increasin arful. They are manifesting this fear through short-term bouts of panic selling during market declines.
One indicator that is not consistent with a market bottom is the Trader's Index (^STI.N). In fact, it is more consistent with market-topping conditions. The indicator measures volume going into advancing issues verses volume going into declining issues and turns bullish over 2.25 and bearish below .50. TRIN hit .42 on Friday and .39 on Thursday. Meanwhile, 5-day TRIN, which turns bullish above 9.00 and bearish below 4.25, is now 3.88. It is basically screaming that the market is overbought. Therefore, while the long-term sentiment indicators are consistent with a major turning point, or showing the type of extreme negative sentiment that contrarians might associate with a market bottom, the short-term indicators suggest that the market is overbought. Therefore, what happens next is anybody's guess and the best bet is to take a long-term approach and stay hedged. |
