Market Internals: The technical action of the market gave investors very few reasons to cheer during the latest, holiday-abbreviated week of trading. Through midday Friday, the Dow Jones Industrial Average ($INDU) had suffered losses in three of four trading sessions. In addition, one of the more disappointing aspects of this week’s trading was the action Friday morning. After a 140-point drop Thursday, there was a weak rally attempt at the open, which was greeted with yet another round of selling. By midday, the Dow was down another 100 points and off 170 points on the week. The NASDAQ Composite Index ($COMPQ), meanwhile, fell three times and gave up 53 points since last Friday.

Sentiment Indicators: A week of relatively uninspired market action failed to stir up any meaningful changes in the sentiment indicators and, as a result, a lot of this week’s Sentiment Journal is a regurgitation of what was said the week before (my apologies if any gets on your shoes.) Take the CBOE Volatility Index ($VIX), for example. The market’s “fear gauge” seems to have found a new home within a range between 24 and 26.5 percent, which is where it spent most of its time during the latest week of trading. So, although stocks are still falling, the VIX doesn’t seem to reflect a growing sense of angst or panic among investors.

However, a number of other indicators continue to suggest that investor anxiety levels are still on the rise. According to AMG Data, another $4.2 billion moved out of stock funds in the week ended February 20, which follows $15.5 billion of outflows during the first two weeks in February and $20 billion in the final two weeks of January. Meanwhile, the American Association of Individual Investors reports that bullish sentiment plunged in its latest sentiment survey.  The latest numbers show bullishness at an anemic 11.18 percent, down from 33.33 percent the week before.  Bearishness rose to 44.70 percent from 41.86 percent.

In the options market? The evidence suggests that many players are still leaning on the bearish side of the trade. For instance, the total put-to-call ratio, which is computed as put volume divided by call volume for trading across the six US options exchanges, has been rising. Figure 1 shows the recent action (10-day average). As stocks recovered in late January/early February, the ratio fell to a three-month low of .88. However, since February 6, it has been moving higher and hit its best levels of the month of .992 on Tuesday. The higher readings suggest that traders in the options market are showing greater interest in put options, which is generally a sign of increasing levels of bearishness or pessimism among investors.

Figure 1: Total Put-to-Call Ratio (10-day Average)

In sum, the increasing levels of put volume, the “high levels of bearishness reflected in the sentiment surveys, the withdrawals from stock mutual funds, and the low readings from the ISEE” which were noted last week, “all confirm that bearish sentiment remain high and is probably still rising. In this environment, the stock market can continue to struggle because money is moving out of the market, which is a negative from a liquidity standpoint.” However, as was also noted here last week, “when the sentiment indicators reach extremes, as they have in recent weeks, there is a good chance that some investors have overreacted. That, in turn, can lead to sudden rallies that are fueled by aggressive short covering. Such extreme levels of negativity can also form the basis for important turning points and major market bottoms for the equity market.”

 

Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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