Optionetics.com SENTIMENT JOURNAL: November's Rally Led by Speculators, Frederic Ruffy
Friday November 29, 5:30 pm ET
Click link for entire article and tables
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Market Internals: Stocks moved mostly higher in the latest holiday-abbreviated trading week. Markets were closed on Thursday due to the Thanksgiving holiday and were open only until 1:00 p.m. ET on Friday. Despite the shortened trading, stocks managed to march higher thanks largely to a 255-point surge in the Dow Jones Industrial Average (^DJI) on Wednesday. That made up for a 173-point loss on Tuesday. For the week, the Dow rose twice and fell twice to finish 90 points higher for the week. Market internals on the New York Stock Exchange were positive on Monday and Wednesday, negative on Tuesday, and mixed on Friday. Volume was relatively light due to the holiday. Finally, the New York Stock Exchange New High-New Low Index [NHNL] remains positive at +15, and that is up ten points from last week.
Technology stocks re gest and the Nasdaq Composite Index (^IXIC) moved modestly higher. After rising nearly 8% during the previous two weeks, the composite index rose 10 points. Market internals on the Nasdaq Stock Market remain strong. Up volume outpaced down volume during three of four trading sessions. The ratio of advancing issues to declining issues, meanwhile, was positive Monday and Wednesday, negative Tuesday, and almost even on Friday. Strength in Internet, fiber optics, and telecomm stocks continues to lift the Nasdaq. Biotech stocks fell, however, and that weighed on the composite index over the past few trading sessions.
Sentiment Data: Stocks continued to march higher during the month of November. The Dow rose 6.4% for the month. In addition, some areas of technology have been on fire. Notice form the comparison table at the bottom of this article that certain areas within the tech sector rose 30, 40, even 50%! Now some market watchers worry that the renewed enthusiasm for low-priced technology stocks is a sign of excess speculation on the part of investors. That is, investors are once again looking for quick short-term gains among extremely low-priced stock in the tech sector and, consequently, the market's recent advance does not represent a well-concerted effort on the part of intelligent investors to make sound or rational buying decisions. As a result, the market's advance is unlikely to last and, in fact, can turn at any moment.
While low-priced technology stocks have provided the leadership during the market's recent advance, that can't go on for very long and there are reasons to expect that the market's advance can continue even if these speculative issues falter. First, the advance is beginning to broaden out and other sectors of the mark ng strength. For example, on Friday, although the Dow Jones Industrial Average fell 35 points, the MS Cyclical Index (^CYC) rose 1.5% and to a three-month high. Leadership from cyclical stocks is generally considered the sign of a healthy market. In addition, for the month, brokerage, transportation, oil service, paper, and retail store stocks all posted respectable gains. Therefore, it appears that other groups (outside of speculative low-priced tech shares) are helping to sustain the market's advance.
At the same time, the speculative activity in the technology sector is not worrisome because other indicators are not consistent with high levels of bullish sentiment. For example, if speculative activity in tech stocks were a sign of market-topping levels of bullish sentiment, one would expect to begin seeing increasing levels of call activity. However, call buying has not been extreme (see the Sentiment Indicators table below) and the CBOE put-to-call ratio, which gives buy signals below .5 and sell signals above 1.00, remained in a neutral .59 to .83 range this week. In addition, the market's fear gauge-the CBOE Volatility Index (^VIX)-rose (from 26.3% to 31.3%) this week and reflects growing levels of market anxiety. Therefore, VIX is not consistent with excessive bullish sentiment. For more on VIX's recent behavior please visit today's Index Intelligence: VIX Breaks the Rule.
Finally, investor sentiment surveys are not showing increasing levels of ntiment. In fact, the widely watched Investors Intelligence survey says that bearish sentiment rose during the latest week (from 24.7% to 25.3%) and bulls fell from 49.4% to 48.3%. Therefore, the type of sentiment one might expect to see at the end of a major advance (which would include complacency, excessive speculative activity, and high levels of bullish sentiment) has not yet surfaced. |
