Market Internals: Stocks moved broadly higher during the second full week of trading in September. Through midday Friday, the Dow Jones Industrial Average ($INDU) posted gains during three of five trading sessions and added approximately 190 points. Two big rallies, on Tuesday and Thursday, helped push the Dow up 300 points and account for most of the week’s gains. However, volume was light throughout the week and market internals were mixed. Market breadth on the New York Stock Exchange [NYSE], measured by the advance-decline ratio, was negative during three of five trading sessions. Meanwhile, the NYSE New High New Low Index is still in negative territory. Midday Friday, 43 stocks were setting new 52-week highs and 67 were falling to new 52-week lows.

The NASDAQ ($COMPQ) rose only two times and added approximately 30 points since last Friday. Volume on the NASDAQ Stock Market has also been unimpressive, with average daily turnover of approximately 1.75 billion shares. Meanwhile, market internals have been somewhat lackluster, with up volume trailing down volume during three of the past four trading sessions and NASDAQ advancers outpacing decliners only one time this week.

Sentiment Indicators: Despite rather lackluster trading, risk perceptions and investor anxiety eased during the latest week of trading. The CBOE Volatility Index ($VIX), for example, fell Tuesday through Thursday. The market’s “fear gauge” was near 25.3% midday Friday, down from 26.2% one week ago.

Other indicators confirm that bearishness is falling. According to the American Association of Individual Investors [AAII], bulls once again outnumber the bears.  In its latest survey, bullish sentiment rose from 38.38% to 40.00%. Bearishness declined to 35.29% from 42.42% Meanwhile, Investors Intelligence says that its latest survey showed an increase in bullishness, from 42.9% to 48.3%. Bearishness fell from 37.4% to 31%.   

The ratio of puts to calls traded across the six US exchanges continues to fall. On Wednesday, for example, 4,290,461 puts and 5,161,312 calls traded and the ratio fell to .83. That, in turn, was its lowest levels in nearly two months. Figure 1 shows the 10-day average of the all-exchange put to call ratio. It is down to .91 and its lowest levels since July 25. The decline in the ratio is a sign that traders are becoming more active in calls, relative to puts, and that is also a sign that the increase in risk aversion and defensive activity witnessed over the past few months is beginning to ease.

Figure 1: Total Put-to-Call Ratio

The shift in risk perceptions is a positive for the stock market in the short-term. As noted last week, it comes shortly after a number of indicators started to show that investor sentiment had reached a bearish extreme. And, from a contrary view of the markets, excessive levels of bearish sentiment can lead to oversold market conditions and set the table for a market advance.

Moreover, if the trend continues, the market can continue climbing as liquidity returns to the market. For example, during the months of June, July, and August, when bearishness and pessimism were on the rise, US domestic mutual funds experienced a series of outflows. According to the Investment Company Institute [ICI], investors pulled $7.4 billion from US equity funds in June and July. TrimTabs Investment Research estimates that another $9 billion during the month of August, according to a recent article on MarketWatch (Investors Pulling Out of US Stock Mutual Funds, by Murray Coleman, August 30, 2007). AMG Data, meanwhile, reports that funds experienced another week of outflows during the first week of September, but inflows finally returned for the week ended September 12. If the pattern continues, and the stock market remains steady, it encourages more people to move money into stocks. In short, as bears shift to the bull camp, the stock market sees more liquidity and the rally can begin to feed on itself.

Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
Visit Fred Ruffy’s Forum

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

Recent Articles by Frederic Ruffy, Optionetics.com

• January 23, 2009
  Closing Wrap-Up, January 23
• February 25, 2008
  Stock Talk: Visa Proposes Largest IPO Ever
• February 25, 2008
  Morning Watch, Feb. 25
• February 22, 2008
  Sentiment Journal: Boooooooo!
• February 22, 2008
  Morning Watch, Feb. 22