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Market Sentiment, Saturday, 05/10/2003

Keep An Ear Open
by James Brown

By the looks of it, bulls are feeling pretty confident. The markets weathered another pull back on minor selling and buyers bought the dip again heading into the weekend. The positive spin that corporate America was able to put on its Q1 earnings season combined with extremely low and easy to beat prior year comparisons is continuing to attract hope. Hope that corporate earnings really have turned the corner. Maybe they have but we're still not seeing any economic evidence that earnings are going to surge higher either. During the excitement of earnings and the pre-war start to a post-war rally the S&P 500 has risen some 17 percent since March 11th while the NASDAQ has climbed 20 percent.

You already know that I'm concerned about our short-term future. The markets have come too far without pausing or pulling back long enough to digest these gains. It's common knowledge that markets cycle through up and down trends and the up trend is looking too extended. Does that mean next week we'll crash? Who knows. Equity markets are known for hitting extremes and it may take climbing to another extreme before the trend reverses.

Believe me, I'm well aware that we've been preaching caution and a potential market turnaround from this column for the last four to five weeks (at least). Yet at the same time I've been clear that we're to trade what we see and that has been a number of bullish trends and breakouts. Hence the preponderance of call plays on the OI play list (this Thursday excepted). An average trader can be successful as long as they limit their losses but this article isn't about stop losses but investor sentiment.

I've said it before; the crowds tend to be right in the middle of the trend and wrong at both ends. I feel that we're approaching the end of the current rally. Now whether the markets go sideways or we get a sizeable pull back is unknown. Keep in mind that the VIX and the VXN have been flashing warning signs for weeks as they drift ever lower. The VXN is near its all time lows and the VIX had broken down to new relative lows and is approaching its more traditional market top signaling range of 20. However, the VIX is not at 20 yet. The bulls might be able to keep the rally alive long enough until the VIX finally reaches its apparent goal.

Stocks have climbed so high in the past six to eight weeks that any potentially negative news can cause sharp bouts of profit taking. We saw that this week with a number of large gap downs on earnings news and brokers downgrading stocks. The VIX may not be showing fear but these gap downs are. Another indicator that has us concerned is the divergence in the put-call ratio. The equity pcr is down to 0.66 (there are six puts bought for every ten equity calls). Compare this to the index pcr's of 1.56 for the OEX and 1.62 for the QQQ and you'll see that index option buyers are buying more puts than calls. These aren't necessarily extreme numbers but they are indicators into investor psychology. The smaller, retail trader is buying call options on stocks because they believe stocks will continue to go up. Index option traders, of which there are many more professional or "smart" money traders for institutions are buying more puts than calls. I see this as a bearish divergence and yet another indicator that a market top may be in the near future.

Contrasting these bearish ruminations are the market internals from Friday's session. The advance-decline ratio on the NYSE was 21 to 7 and on the NASDAQ it was nearly 21 to 9. New 52-week highs were 386 to 31 new 52-week lows. Up volume was almost four times down volume on the NYSE and up volume was more than 3.5 times down volume on the NASDAQ. Again, these are not extreme numbers but they are bullish for the market.

Just looking at the charts and the clear bounces at rising trendlines for the major indices makes it logical to think that early next week can be bullish. Traders need to be wary of bad news and we still have the last full week of earnings with retail heavy weights like WMT on Tuesday and KSS and TGT on Thursday. Tech companies AMAT and NTAP also report on Tuesday with DELL reporting on Thursday. Plus Wall Street will be waiting for the Retail Sales report, PPI, CPI and Capacity Utilization economic reports all out this week. Also keep an ear open for any news from the two technology conferences going on this week with Salomon Smith Barney and USB Piper Jaffray both throwing conferences on Tuesday-Wednesday of this week.

Market Averages


52-week High: 10353
52-week Low :  7197
Current     :  8605

Moving Averages:

 10-dma: 8527
 50-dma: 8204
200-dma: 8321

S&P 500 ($SPX)

52-week High: 1107
52-week Low :  768
Current     :  933

Moving Averages:

 10-dma:  924
 50-dma:  876
200-dma:  881

Nasdaq-100 ($NDX)

52-week High: 1351
52-week Low :  795
Current     : 1144

Moving Averages:

 10-dma: 1127
 50-dma: 1060
200-dma: 1000


The nearly 7% drop in the VIX volatility index to the 22 mark is
a clear and present danger to traders willing to note the warning.
Investor sentiment is too bullish and a trend change is not far
away although the market may go to extremes before finally reversing
and the VIX may have to hit 20.  Keep those stops tight.

CBOE Market Volatility Index (VIX) = 22.04 -1.65
Nasdaq-100 Volatility Index  (VXN) = 32.09 -1.20

Put/Call Ratio Call Volume Put Volume Total 0.82 472,166 387,917 Equity Only 0.66 370,257 244,196 OEX 1.56 21,019 32,750 QQQ 1.62 16,722 27,171
Bullish Percent Data Current Change Status NYSE 56.4 + 1 Bull Confirmed NASDAQ-100 78.0 + 1 Bull Confirmed Dow Indust. 66.7 + 3 Bull Confirmed S&P 500 64.2 + 1 Bull Confirmed S&P 100 65.0 + 1 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend
5-Day Arms Index 1.24 10-Day Arms Index 1.05 21-Day Arms Index 1.04 55-Day Arms Index 1.27 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points.
Market Internals -NYSE- -NASDAQ- Advancers 2140 2093 Decliners 710 940 New Highs 225 161 New Lows 16 15 Up Volume 1231M 1185M Down Vol. 363M 324M Total Vol. 1613M 1526M M = millions
Commitments Of Traders Report: 05/06/03 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 We knew it would be a quiet week on Wall Street last week, aside from the FOMC meeting, and we see little change in the Commercial's net-long stance. There has also been little change in the Small Trader's net long stance either. Commercials Long Short Net % Of OI 04/15/03 424,219 409,853 14,366 1.7% 04/22/03 430,758 423,295 7,463 0.9% 04/29/03 432,710 419,245 13,465 1.6% 05/06/03 429,519 419,545 9,974 1.2% Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: 14,366 - 4/15/03 Small Traders Long Short Net % of OI 04/15/03 148,434 137,680 10,754 3.8% 04/22/03 147,068 140,153 6,915 2.4% 04/29/03 149,616 154,782 5,166 1.7% 05/06/03 150,345 148,681 1,664 0.6% Most bearish reading of the year: 10,754 - 4/15/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 It is the e-mini positions that we are seeing some shifts. The Commercials have bumped up their longs by more than 30K while reducing their shorts by about 25K. Looks like money is shifting sides here. Small Traders have also shown a small reversal with longs decreasing by almost 40K and shorts jumping by more than 10%, but they remain significantly net long while Commercials are exceedingly net short. Commercials Long Short Net % Of OI 04/15/03 119,316 390,555 (271,239) (53.2%) 04/22/03 124,200 437,597 (313,397) (55.7%) 04/29/03 134,751 472,247 (337,496) (55.6%) 05/06/03 169,388 447,330 (277,942) (45.1%) Most bearish reading of the year: (337,496) - 04/29/03 Most bullish reading of the year: (222,875) - 04/01/03 Small Traders Long Short Net % of OI 04/15/03 365,876 44,137 321,739 78.5% 04/22/03 395,596 40,480 355,116 81.4% 04/29/03 459,687 50,030 409,657 80.4% 05/06/03 423,918 55,932 367,986 76.7% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 409,657 - 04/29/03 NASDAQ-100 It's pretty much dead-even on the Commercials positions on the NDX. Meanwhile the Small Trader has increased their position sizes in both longs and shorts. Commercials Long Short Net % of OI 04/15/03 44,976 37,929 7,047 8.5% 04/22/03 45,647 38,531 7,116 8.5% 04/29/03 45,497 37,557 7,940 9.6% 05/06/03 46,327 38,216 8,111 9.6% Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 04/15/03 11,182 17,438 ( 6,256) (21.9%) 04/22/03 10,929 20,376 ( 9,447) (30.2%) 04/29/03 11,219 19,760 ( 8,551) (27.6%) 05/06/03 13,482 21,010 ( 7,528) (21.8%) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Again we're not seeing any big shifts of money or attitude in the Commercials or the Small Traders. The "smart" money is still net long the Industrials and the small guy is just barely net short. Commercials Long Short Net % of OI 04/15/03 17,881 13,124 4,757 15.3% 04/22/03 16,942 14,750 2,192 6.9% 04/29/03 17,927 14,083 3,844 12.0% 05/06/03 16,772 13,568 3,204 10.6% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 04/15/03 7,748 8,704 ( 956) ( 5.8%) 04/22/03 8,081 8,275 ( 194) ( 1.2%) 04/29/03 7,081 8,604 (1,523) ( 9.7%) 05/06/03 7,829 8,642 ( 813) ( 4.9%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01


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