Wednesday, March 31, 2010

A Look at Sentiment and Stock Market Strength

As we can see, the CBOE equity put/call ratio has averaged about .60 since the fourth quarter of 2009. We've tended to spike higher than average (showing relative bearishness) near intermediate-term low points and have tended to register below average (showing relative bullishness) readings around intermediate-term peaks. That ratio has been largely below average for a while now, indicating that traders remain relatively bullish following the market's rise to fresh highs.

Although we're trading relatively near those bull highs, the number of stocks registering fresh 20-day highs vs. lows has remained subdued. As I noted in my recent tweet, we saw 969 stocks across the NYSE, NASDAQ, and ASE make fresh 20-day highs on Tuesday and 398 score new lows. Earlier this month, we had over 3000 new 20-day highs.

That being said, the recent movement has suggested more sector rotation than outright correction: of the 40 stocks in my basket (five from eight S&P sectors), fully 32 are trading in uptrends according to my Technical Strength measure. (That indicator is also updated each morning prior to the market open via Twitter). We're also hovering near bull market highs in the advance-decline line specific to NYSE common stocks, as noted by Decision Point. While sentiment could constrain the near-term upside here, we're not seeing the kind of technical deterioration that generally precedes major market selloffs.