Market Internals: At the risk of stating the obvious, the technical action of the market was awful this week. Even on Monday and Wednesday, when the Dow Jones Industrial Average ($INDU) posted gains of 92 points and 68 points, respectively, market breadth was negative, with advancers trailing decliners on both the New York Stock Exchange [NYSE] and the NASDAQ Stock Market. The remaining three trading sessions were absolutely gut-wrenching and, at the end of the week, the Dow had given up 680 points and the NASDAQ was down 130.  

The more difficult question to answer is, whether or not investors overreacted and, if so, when to expect a rebound. The volume statistics on the NYSE Thursday certainly hints at panic-like selling. On Thursday, volume surged to 2.75 billion shares (compared to 1.525 billion the week before) and down volume accounted for 94% of that action.  The NYSE New High New Low Index also reached an extreme and hints at capitulation. On Thursday, it fell to -788, with 801 Big Board stocks falling to new 52-week lows.   

Sentiment Indicators: In addition to the jump in down volume and the surge in the number of stocks setting new 52-week lows, there is a lot of other evidence that bearish sentiment reached an extreme this week. For example, the CBOE Volatility Index ($VIX) closed up 3.43 points on Friday and to its best levels since April 2003. It rose 2.64 points to 20.74 on Thursday amid a record amount of put volume. Figure 1 shows the total put volume across all six exchanges on Thursday. It surpassed 12 million contracts, which easily exceeded the 10 million put options that traded on February 27^th.  

Figure 1: Total Put Volume

The change in sentiment during the latest stock market decline stands in stark contrast to the setting just one week ago. In fact, last week’s installment of Sentiment Journal was entitled “Rough Seas Ahead?” and was based on the view that the stock market was at risk amid deteriorating market internals and signs of excessive bullishness or complacency among investors. The article showed a chart of call volume, not put volume, reaching extremes.

What a difference a week makes. The tables have clearly turned and it now seems that bearishness is at a new extreme. Does this mean that investors have overreacted and stocks will bounce higher from here? Perhaps. But, it might take more time to fully wash the bullish sentiment out of the market and create enough bearishness and pessimism to form the basis for a meaningful stock market advance. The latest decline has lasted a little over six days. The February to March debacle was very short in duration, but did last a little over two weeks. So, it might be premature to call a bottom and it might make more sense to wait for the technical action of the market to improve. You know what they say, “it’s the second mouse that gets the cheese.”