Chart of the Week February 14, 2004

Chart of the Week – February 14, 2004

Brett N. Steenbarger, Ph.D.

Friday’s Weblog entry noted, “Institutional Sentiment has been unusually strong. What this means is that large traders are paying relatively large premiums for the SP futures, but that this optimism has not translated into sustained strength across stocks, as the reduced number of new highs vs. lows reveals. This is not favorable for the bulls.”

Below we can see the rise in Institutional Sentiment (blue line) on the oscillator. Notice that the run to new highs on the ES Futures saw a spike in optimism, as traders were willing to pay more in premiums to purchase the futures.

Now take a look at the Cumulative NYSE TICK, which shows buying/selling pressure across a broad range of stocks:

Notice that, on the move to new highs, the Cumulative TICK could not retrace even half of its previous decline. While traders were paying high prices for the futures, their interest was not sufficient to move the majority of stocks higher. We know this by tracking a basket of stocks that mirror the S&P 500 and looking at how many are making new highs versus new lows on a twenty-day basis:

Notice that, on the rise to new price highs on the SPX, only a little more than 20% of the issues made new twenty-day highs. Importantly, the buying interest in the futures was not sufficient to move even those large capitalization stocks that dominate the futures!

Friday’s downside trading rewarded the caution provided by these measures. Institutional Sentiment in itself is not such a great predictor of future price action. It is the degree to which sentiment can move the markets that is most crucial.

Brett N. Steenbarger, Ph.D. is Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. He is also an active trader and writes occasional feature articles on market psychology for MSN’s Money site (). The author of The Psychology of Trading (Wiley; January, 2003), Dr. Steenbarger has published over 50 peer-reviewed articles and book chapters on short-term approaches to behavioral change. His new, co-edited book The Art and Science of Brief Therapy (American Psychiatric Press) is due for publication during the first half of 2004. Many of Dr. Steenbarger’s articles and trading strategies are archived on his website, .