SENTIMENT JOURNAL: Hold On to Your Hat!
optionetics.com
Market Internals: In a roller coaster week, the Dow Jones Industrial Average ($INDU) rose three times and fell twice to finish the week up 120 points. Market internals and volume on the New York Stock Exchange improved as the week progressed. On Monday and Tuesday, it was business as usual as down volume outpaced up volume, advancing issues lagged declining issues, volume was light, and stocks fell. On Wednesday, stocks made modest gains, but internals were marginally negative. On Thursday, investors had to hold on to their hats because stocks shot off like a rocket. The Dow gained 270 points, volume surged to the highest levels of the year, and advancing issues trounced declining issues nearly three-to-one. A similar theme played out on the Nasdaq Stock Market. The Nasdaq Composite Index ($COMPQ) moved modestly higher on Wednesday, surged on Thursday, and was little changed on Friday. For the week, the composite index rose 35 points, or 2.7%, and was pushed higher by strength in semiconductor, software, and Internet stocks.
Technically, the most significant event this week happened Wednesday at about 1:00 p.m. ET when stocks stopped their descent and reversed course to finish in positive territory. Technically, the action had all the properties of a key reversal day, which often occurs mid-week after a steep market slide. The selling ends suddenly Wednesday afternoon and stocks recover the day’s losses before the final bell. Additionally, trading volume becomes heavy when stocks reverse course.
This week had the characteristics of a key reversal. Specifically, after plunging Monday and Tuesday, stocks fell sharply in early trading Wednesday and then began a climb higher. The Dow erased more than 100 points of losses and finished the day up 28 points. In addition, volume exceeded 1.5 billion shares on the New York Stock Exchange and that was the most trading activity on the exchange since late-January. Then, on Thursday, the Dow surged 270 points on the heaviest volume of the year. On Friday, the market held on to those gains and the Dow even rose 37 points higher. Therefore, judging from the price and volume action of the Dow, Wednesday had all the makings of a key reversal trading session that could pave the way for more gains going forward.
Sentiment Data: While the technical action of the market could be consistent with a major pivot point in the market, the sentiment data never fully lined up to suggest that a market bottom is at hand. For example, many market watchers are waiting for the CBOE Volatility Index ($VIX) to spike to the 50% level. The market’s so-called “fear gauge” rose above 40% during the trading session on Wednesday. Many market watchers believe that, once VIX breaks 40%, it will make a move up to 50% before stocks fully recover. 50% has coincided with other market bottoms such as the ones established in July and October 2002. In this case, however, it appears that some stock traders used the 40% level as an entry point because shortly after VIX hit that mark on Wednesday stocks reversed course and never looked back.
The action in the options trading pits has not been consistent with high levels of bearish sentiment that have formed the basis for past market bottoms. For example, the CBOE put-to-call ratio, which often spikes higher at market bottoms, has not risen above the critical 1.00 level in recent weeks. In fact, during the past seven trading sessions, the ratio averaged a neutral .81. Furthermore, other indicators from the options market such as the Nasdaq Volatility Index ($VXN), the index put-to-call ratio, and Bollinger’s Put Volume Indicator [PVI] never produced readings consistent with market basing levels of pessimism or bearish sentiment.
While the sentiment data never fully lined up to suggest that a market bottom was at hand, at least one indicator provided an early warning that a rebound was forthcoming. On Monday, the Trader’s Index ($TRIN) jumped up to 5.79 and its highest reading in more than five years. TRIN produces high readings when there is heavy volume in declining issues. Extreme spikes in the Trader’s Index suggest that the market is being sold out. To put it in perspective, Monday’s reading of 5.79 was the highest reading since October 27, 1997, which was just before the Dow recorded a one-month 15% advance. For more on this indicator, please visit Wednesday’s Index Intelligence: The Trader’s Index Spikes Higher.
Chip Index ($SOX) +6.7% - SOX breaks above the key 300 level and the 50-day moving average, but meets resistance at the 200-day MA. A break above that level and, move out of the way of the chip stocks! |
