Optionetics Articles SENTIMENT JOURNAL: Sentiment Shifts Mid-Week
By Frederic Ruffy, Optionetics.com
4/4/2003 3:30:00 PM
optionetics.com
Market Internals: Stocks surged to start the second quarter. After tumbling more than 150 points on the last day of March (Monday), the Dow Jones Industrial Average ($INDU) jumped nearly 300 points during the first two trading sessions of April. In the end, the Dow rose three times, fell twice, and recorded a 130-point gain. For the second week in a row, volume fell towards the end of the week and by Friday only 1.2 billion shares traded on the New York Stock Exchange [NYSE]. The low trading volume during the end of the week is a sign that investors are not willing to make strong commitments ahead of the weekend.
The Nasdaq Composite ($COMPQ) fell three times and rose only twice. Nevertheless, the composite index surged nearly fifty points on Wednesday and that was enough to help push it into positive territory for the week. By Friday, the Nasdaq was fourteen points above week-ago levels. Volume was not terribly impressive. The exception was on Wednesday, when the Nasdaq surge and the shorts ran for cover. By the end of the week, most sectors of technology like semiconductors, software, and computer stocks had moved modestly higher. Networking stocks were the top performers. Internet stocks fell.
Sentiment Data: If war, earnings, and the economy don’t have you worried, the latest readings from the sentiment data might. After the two-day rally to start the second quarter, the stock market became short-term overbought. That was reflected in a number of ways. For example, the CBOE Volatility Index ($VIX) a.k.a. the “fear gauge,” fell to its lowest levels in more than two months. The Trader’s Index ($TRIN) produced an extremely overbought reading of .39 at the close of trading on Wednesday. Meanwhile, call volume across the five option exchanges surged to 2.165 million contracts, compared to only 1.366 million contracts the week before. So, on Wednesday, the drop in VIX, the low readings from TRIN, and the surge in call activity were all indicative of extremely bullish sentiment—and short-term market topping conditions.
After the market became overbought and the sentiment data hit what some might consider to be market-topping levels, stocks turned lower and sentiment started to shift. Beginning on Thursday, VIX started to rise. Even on Friday, when the Dow moved higher, the market’s fear gauge moved modestly to the upside. The Trader’s Index returned to more normal levels and call activity subsided. Additionally, on Thursday, call volume totaled 1.653 million, which was 25% less than Wednesday’s levels. Meanwhile, put volume rose from 1.33 million on Wednesday to 1.40 million on Thursday. Therefore, after Wednesday’s buying spree in the stock market (and subsequent overbought readings from key indicators), it appears that a sense of anxiety crept back into the market.
Generally, when bearish sentiment begins to rise after the market reaches overbought levels, there is a risk that stocks could fall further. Simply put, as investors become more anxious or uncertain, they are more apt to be sellers and profit-takers (rather than buyers) of stocks. Therefore, the risk-reward begins to favor the downside. The key will be to watch some of the indicators early next week. For example, the index put-to-call ratio dropped to .91 on Friday. The indicator rarely drops below 1.00 [because there is almost always more index put than call volume (see table below)] and suggests that the market is still short-term overbought. The Put Volume Indicator [PVI] has also been producing low readings. If it begins to rise, that will be another sign that investor anxiety is on the rise. Of course, VIX, the CBOE put-to-call ratio, and the Trader’s Index will all be worth watching as well. As long as these indicators point to growing levels of investor angst, fear, or bearishness, there are likely to be more sellers, rather than buyers, in the stock market. |
