May 20, 2002

sentimenTrader.com

Friday, May 24, 2002 6:52 PM EST

Please check back on Sunday for the regular weekly commentary. All daily charts have been updated with today's data. Have a good and safe holiday weekend.

Thursday, May 23, 2002 9:59 PM EST

If you don't bother to read any further, let me suggest that you check out the study on the site of the cumulative TICK reading that we have today. At least see the conclusions below.

I suggested yesterday that the possibility of a rally was still alive, and it showed itself today. We had quite a large run-up in the afternoon, for whatever reason. I don't care too much about the reason, only the reactions to whatever news is announced. The rally certainly wasn't due to oversold sentiment conditions, since they were overbought if anything before the rally began. The STEM.MR model is now firmly in SELL territory, and it will be the same drill tomorrow as it always is - if the market drops during the first 1/2 hour, we probably will not get a signal issued, but if we have something of a rally, there is a very good possibility that one will be issued. It depends on the current situation of course, but my gut feeling is that I will be giving it three stars should it occur.

The STEM model gave a string of very low readings today. 9 of today's 13 readings (since 1/2 hourly data is used, there are 13 measurements each day) were in the bottom 15% of all readings over the past four years. However, since we use moving averages of this model as the signal generator, no signal has yet been issued. It would actually probably take another two days of a rally before we could get a signal, since the 50-period moving average (the signal line) will be dropping low figures tomorrow and Tuesday morning. The 20-period moving average is currently .29 and should there be a rally tomorrow, this could drop like a stone. I don't generate signals off of that line, but it has proven effective at identifying short-term overbought conditions.

The 10-day TRIN is now officially overbought. Tomorrow we will be dropping a reading of 2.43 from that moving average, so if we have an "average" day tomorrow in this indicator (1.09 is the average value of the TRIN over the past four years), the 10-day average will drop to 0.91, which places it in the bottom 12% of readings over those four years. Since the beginning of 2001, the 10-day TRIN has been in this general vicinity 7 times. They all preceded at least a short-term decline, and usually a pronounced decline or choppy market at best.

The advance/decline line will be dropping a reading of -959 tomorrow, so we could see this cycle up to overbought quite quickly if we get another large number tomorrow.

So much for fear from the options crowd. The CBOE put/call ratio declined today to .62 from .86, a drop of nearly 30%. However, there seems to be a very slight non-contrarian aspect to this in the very short-term, since when the p/c ratio declined 25% or more in a single day, it lead to an UP market 58% of the time over the past few years. I did not find that it lead to any statistically significant results one way or the other after 1 day. I prefer to look at this ratio on a longer time frame (such as the 10- and 21-day moving averages), and so far those are neutral to actually somewhat bullish. The open interest ratio is also somewhat bullish as is the OI-P/C spread. My TOPM model continues to decline, suggesting puts are still being bid quite heavily in relation to calls. Although it is in a bullish trend, it is not at an absolute level where I could consider it bullish (but it's pretty darn close).

One of my personal favorites, the VIX, is now just about 10% below its 10-day moving average. I don't ever mean to suggest that this indicator is perfect, since it is far from it at times, but lately it has been pretty spot-on. Take a look at the VIX.MR chart (in the MR Components section of the site). Over the past month, when it reached a bullish extreme and reversed, the market rallied. Bearish extreme and reversed - market fell. Make another check mark in the bearish column tonight (or rather, once we have a bone fide reversal in the indicator).

The bulls do have one thing to hold their hat on tonight - the AAII poll shows the greatest percentage of bears since 9/14/01, 7/06/01 and 4/06/01. This noisy indicator, though, could swing back to net bullish next week. It's hard to gauge this populace, but I do think it's something to note.

I suggest that everyone check out the study I posted today in the Research section on the NYSE cumulative TICK indicator. Today that indicator is showing a reading of +5383, which is quite overbought. The study looks at past occurrences where this indicator was this overbought over the past four years, which encompasses both a raging bull and raging bear market. Although I suggest you check out the study on the site to better see the results, the conclusions are listed below:

60% of the time, the cumulative TICK continued on its upward path before eventually reversing as the market dropped.
The average return after a cumulative TICK reading of +5383 or greater was negative across all time periods studied (1 - 60 days), and also less than a random return across all time periods.
The S&P 500 was lower a majority of the time across all time periods, except for three days. Going out 10 days and longer, the market was lower at least 75% of the time across every time period (after 10 days).
After 30 days, the market was lower every time.
The average loss was greater than the average gain across all time frames except ten days (that can be accounted for in the bottom table).
The minimum return was of a greater magnitude than the maximum return over every time period.
There was a fairly steady dispersion of these occurrences - it happened on average twice per year (distinct occurrences).
January had 8 occurrences, March/April had 7, July/August had 4 and November had one.
The bull market of 1998-99 showed no discernable difference in results from the bear market of 2000-02.
Taking out the consecutive readings significantly affected the results. Namely, the percentage of the time the market was lower increased; the average return decreased; the average negative return decreased; the average positive return decreased; and the maximum return decreased.

What good does it do to consider unique occurrences? Well, I think we can safely say that one would not want to simply go out and short the market at this point, but instead wait for the time where the TICK begins a reversal back down. That would make today a unique occurrence and we could place more weight on the second table's results. Of course, I would NEVER suggest that ANYONE just go out and short anything because of one study of one indicator, but it gives us an idea of what has happened in the recent past when this situation has occurred.

The average NYSE daily TICK reading over the past four years is 247. If we have a "normal" day tomorrow, the cumulative TICK will become 5630 (even more "overbought").

The intraday cumulative TICK has now cycled back up from oversold (right at the recent bottom) and is at the overbought level as well.

I STILL think there's room for a rally at this point, but probably about the time the S&P and NDX reach their recent highs, many of our indicators would become extremely overbought and it would be difficult to imagine much of a move beyond those points. Something tells me there's a whole hoard of traders waiting to short those highs. Of course, what that also means is that if we somehow exceed the highs, we could see a large short-covering rally as the stops are taken out. That's one rally where I'll be looking to take the other side. The most likely scenario is a decline from these levels or just above. If there is a decline, I have no idea how far it could lead (recent lows? September lows?), nor do I care. I will simply watch and wait for sentiment to become overdone on the other end, like it always has and probably always will, and take the other side of the trade.

Wednesday, May 22, 2002 4:55 PM EST

I mentioned yesterday that the STEM.MR model ended in BUY territory and we would likely get a signal unless the market rallied in the first 1/2 hour. Even with the gap-down open, the S&P and NDX quickly rallied to close the gap and rendered the model neutral before a signal could be issued. After the indexes cooled off a bit, we did get another signal to BUY in that model, which quickly dissipated once we rallied just a couple of points. Soon after the change to neutral, we sold off once more before staging a good rally into the close.

At this point, all models are firmly in neutral territory, with no biases in either direction. However, some of our indicators will soon be quite overbought. The 10-day TRIN is hovering around the lower end of its range, with two large numbers about to drop off Thursday and Friday, which of course will force the moving average down even further provided they are not cancelled out with high numbers later this week. The advance/decline line will also be dropping two large negative numbers the rest of this week. We won't be near the upper end of the range unless we get large positive readings tomorrow and Friday, but the trend will now most likely change from oversold to overbought fairly quickly.

The cumulative TICK on both the NYSE and Nasdaq are somewhat overbought and the intraday charts are cycling back up from very oversold with today's action. If we get a couple of high-TICK days on the NYSE, this indicator could be "maximum" overbought (if there is such a thing) by Friday, as we will be dropping a couple of low readings here as well.

A preliminary look at the sentiment surveys showed another slight uptick in bullishness for the most part. Nothing exciting, but it's the wrong trend if you're looking for much of a rally.

The options crowd continues to seemingly provide some support for the market, at least sentiment-wise, as the put/call ratios remain elevated and the TOPM model keeps falling (suggesting that puts are being bid somewhat heavily in relation to calls - a good contrary indicator). As has been the case recently, however, we're not getting any confirmation of this from the VIX, which I consider quite neutral at this point.

The trading day before Memorial Day is a seasonally strong day (according to Martin Zweig in his book "Winning on Wall Street"), so that coupled with the fact that the GDP number comes out pre-market on Friday, could have a substantial effect on the remainder of this week's action. We've had the lowest volume week since December, and I don't suspect it will pick up much tomorrow or Friday, save for the usual flurry after the economic numbers.

The rally possibility that I mentioned yesterday is still alive as far as I'm concerned, but I continue to be of the opinion that it may not make it very far. With our longer-term indicators likely reaching extremely overbought conditions with any further rally and a long-term downtrend still in force, I would not be comfortable chasing any upside.

Tuesday, May 21, 2002 5:11 PM EST

The SELL signal generated by the STEM model on Friday dissipated more quickly than they normally do with the drop the past two days. It's not that we've had such high readings, but we dropped such low readings that it didn't take much of a selloff to take the model into neutral. We're now neutral across the board.

You may have noticed some new charts up this afternoon. I will now be posting the cumulative TICK readings for the NYSE and Nasdaq using both daily and intraday (30-minute) data. These indicators simply take the end-of-period reading and add it to the previous one. If we have a long string of high TICK readings, the cumulative TICK will become larger and larger. For those of you unfamiliar, the TICK is an indicator that subtracts those issues trading on a down tick from those trading on an up tick. You can see from the charts that these indicators have done a fairly decent job of tipping off intermediate highs and lows, although I don't think that's the best way to use them. I prefer to use them as an overbought/oversold oscillator within the context of the current trend. So, if we are in a sustained downtrend and the cumulative TICK becomes overbought, that would give me more confidence to go short. I guess I picked a good day to post the charts, because we have a very interesting situation setting up for us now. The daily charts are close to overbought territory (in the context of a downtrend) while the intraday charts are buried in oversold extremes. Looking at past occurrences of this divergence over the last few years, there is no solid conclusion to be drawn from the historical precedents. Sometimes we rallied, sometimes we kept right on falling. There was no reliable pattern. However, I think I can say with some basis that there was often a very short-term rally before the overriding downtrend (and overbought daily situation) re-asserted itself. That could make sense here, as we've now filled the gap from May 14th and hit the 50% retracement of the most recent rally (sorry, I slipped - a bit of technical analysis there).

We got a little kick in some of our short-term sentiment gauges today, enough to push the STEM.MR model into BUY territory. If we see continued pressure tomorrow morning, there's a good chance we'll see some kind of a BUY signal out of that model. If we have a rally in the first 1/2 hour, we most likely will not get a signal.

The put/call ratios increased quite a bit today, which is normal like I suggested yesterday. We're still not seeing anything close to an extreme there though. Coupled with the low (but rising) VIX and high (but falling) TOPM, it appears as though some fear is beginning to show itself in the options market, but it's not anywhere close to being actionable.

The breadth oscillators (esp NH/NL) are now close to being oversold, although there's a lot of room for them to drop still. The A/D oscillator is not going much of anywhere since we're dropping a string of large positive numbers but are now replacing them with large negative numbers.

It's very possible to imagine a small rally somewhere in here, but sentiment does not appear to be in a place where it could go very far.

Monday, May 20, 2002 11:15 PM EST

Today was yet another example of what can happen when sentiment becomes even somewhat extreme before economic releases. If you were long going into the Leading Indicators number today, I believe your risk was increased substantially while short-term sentiment was as bullish as it was. Of course, it depends on your time frame, and the number could have blown away estimates on the upside, but it's a matter of managing risk and probability. And probability says that when sentiment is bullish going into widely-followed economic releases, it usually takes a rather large upside surprise to spark the market much further.

Even with the gap-down opening and subsequent decline after the number, we didn't see a very large rise in our sentiment gauges. The S&P dropped about 1.3%, but the STEM.MR model didn't even make it above 40%. I mentioned this weekend that the longer-term STEM model would be dropping a string of very low readings today, and even with that, the model didn't rise more than 8 points. Basically, it means there was not much concern with today's action. We may continue to see this kind of complacency as long as we remain above the breakout level of a few days ago. If we start sliding into that area, fear may pick up a bit.

One notable thing was that the put/call ratios actually dropped today. The CBOE put/call ratio typically rises when the market falls. In fact, during the past two years, it has typically risen about 65% of the time when the S&P 500 closes lower than the day before. Today the S&P 500 dropped about 1.3% but there was no corresponding increase in the put/call ratio. There have been 19 times in the past two years where the S&P dropped between 1.2% - 1.4%, and of those 19 times, the put/call ratio rose 63% of the time, with an average gain of 7% in that ratio. So I looked at the times where the market dropped and so did the put/call ratio, expecting that the absence of fear during such a decline smacked of a lack of concern. I was extremely surprised by the findings, as a significant 74% of the time, the S&P actually ROSE the day following such an occurrence, while contrarian logic would suggest the market would continue its drop. Going out two days or more didn't lead to any conclusions. My TOPM model also rose today, suggesting calls were being bid quite heavily in relation to puts. That's not a good sign in a rising market, and REALLY not a good sign in a declining market. When calls are being bid as the market drops, that tells me that options traders believe the correction will be quick and shallow. It very well may, but it makes me uneasy to be on the side of call buyers. One offsetting factor with the options crowd was the increase in the VIX. During this same time period, the put/call ratio and the VIX moved in tandem 61% of the time, so it's somewhat unusual to see them diverge like this.

Volume was the lightest on the NYSE since late December, and close to that on the Nasdaq. We also don't have any economic numbers until Thursday I see, so we may be in for something of a slow week. Have people already taken off for the Memorial Day holiday?

I try to avoid discussing technical or fundamental issues here too much, but there are several reasons why the levels just below where we are now are important. If we break too much below today's lows, we could see some increased selling, particularly if volume remains light. There also are some significant resistance points above, so we may be stuck here for a bit, but the break in either direction when it comes could be very telling. Right now, we don't have much of an edge sentiment-wise, although I would have to say sentiment suggests that the short-term bias remains down until we see some fear creeping back into the picture.