Another Day of Gains as Volume Ends Mixed

The Dow Jones Industrial average lags as the NASDAQ and Russell 2000 continue their dominance.  Lagging the NASDAQ and Russell 2000, the Dow Jones Industrial average continues to be a weak spot in the market.  Today was no exception, but volume on the NYSE jumped.  Pushed by trading in Citigroup and AIG volume rose on the NYSE, but fell on the NASDAQ.  Price action remains good, but closing just above the mid-point on the day will wear on the market.  Today was just another positive day in the market where our longs continue to outperform the overall market.

An important indicator that many tend to not look at is how the market leaders are performing in the market.  The stocks we view as leaders continue to display positive price action and have yet to offer true sell signal.  Sure, we have taken profits, but we haven’t seen clear sell signals.  Sell signals given by market leadership is a warning sign the overall market is getting ready to roll over.  Pay attention to leadership and if they stay strong this market will remain strong.

Fear indicators jumped today, even with strong leadership it appears put buyers stepped up today.  The put/call ratio jumped to .79 from a reading below .7 yesterday.  Normally, if we were nearing a top we’d not only have stumbling leadership, but the put/call would be shrinking under .6.  Perhaps we have money managers and hedge funds buying protection on current long positions.  But, it does show a pessimistic view of the market, something we like to see.

Another popular fear index is the VIX.   A rising VIX will often correlate to the market rolling over.  Or in some cases it is a positive divergence where it signals the wall of worry has yet to be taken over.   It is necessary to maintain the wall of worry as exuberance often markets the end of a market rally.  IBD/TIPP poll showed consumers at pessimistic levels in the face of a rising market.  Sentiments shouldn’t be used as an investing tool, but you should be aware if the crowd is overly bullish.

We like a bearish market sentiment and it’ll be interesting to see what the AAII members view this market.  Last week bulls stood at 36%, will they increase after the current move?

The number one indicator will always remain the market leadership and listening to your leaders will set you down the right path.

Stay disciplined.