Less than Zero

Friday, April 23, 2004 | 01:39 PM

Not every rally is preceded by a clear signal - no one rings the proverbial bell at tops or bottoms. But it is confidence inspiring to see additional confirmation of any signal. Indeed, many of our previous market calls have been made when we there was clear objective evidence, via quantitative measures, of extremes in sentiment, market internals, or economic data.

We also prefer to see verifiable data points supporting any outsized moves. Unfortunately, that was not the case when it came to yesterday’s rollicking rally. Of all the data points we track, only one - the stock market's advance-decline data - reached truly extreme levels before the move up. According to Wall Street Winners, on Tuesday, April 13 “there were more than 2,500 more declining stocks on the New York Stock Exchange than there were advancers. That turns out to be a record.”

But when we look for other confirming signals, we come up empty. Indeed, prior to yesterday’s rally, many of our favorite indicators were closer to sell signals than buys:

· AAII Bull Bear Ratio: is not particularly encouraging. With the Bulls over 60%, and the Bears under 20%, this is at the exuberant levels which signal an imminent decline. However, it is much closer to a Sell than a Buy signal. Recall on January 22, we noted the Bears were at 10%, and the Bulls nearly 70%.

· Volatility Index (VIX): is once again near recent lows. The primary difference? In late January, the VIX made fresh 52 week lows; That 14-15 area has become a support level (spread triple bottom), where the VIX seems to bounce off of. Thus, at these levels, the volatility index is not behaving like a major complacency sell signal.

· Put Call Ratio: The huge drop in Put/Call ratio we saw late January has not materialized. The recent reading of 53.73 is halfway between a Sell and a Buy signal. We are less sanguine about making major market calls with this indicator so ambiguous.

Yesterday’s internals were much improved: Up down volume, advance-decline ratios were the best they had been in over a month. The Sentiment data is merely telling us to be a little more wary than usual. Until it outright causes a marked breakdown in the internals, it is “only” a cautionary sign, and not an outright actionable sell signal. As such, we will be uncomfortably Bullish as the market works its way through earnings season.

Friday, April 23, 2004 | 01:39 PM | Permalink | Comments (2) | TrackBack (1)
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Tracked on Apr 23, 2004 4:22:14 PM


Pet peeve of mine. The VIX index is a lousy sentiment indicator. I know the CBOE markets it as one, but it isn't. The VIX index will most closely match the actual level of volatility at which the market is moving. If traders started buying options at vols well above the actual vol, they would lose money quickly.

Unless, of course, the implication is that low historic vol implies complacency, but that seems a bit of a reach.

Further, current VIX readings are low by comparison to the last 5 years, but only average compared to most of the 90s.

As for the other indicators, I defer to your superior knowledge.

Posted by: Pete Harrigan | Apr 23, 2004 3:20:03 PM

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