Despite Postive Sentiment Trends, Price Action Remains Negative

Despite the fact that my sentiment indicators are flashing bullish signals, the price action on the NDX and NASDAQ remains very weak.  This indicates to me that, at best, a trading range will continue for the broader indexes and, at worst, the bear market is back in effect. 

The market sentiment clearly turned negative over the past two months.  Both the Investor Intelligence numbers and the options sentiment are pointing to a higher market. 

According to Investors Intelligence, the percentage of investment newsletter writers who are bearish climbed to over 36% during the last week of June.  This is the highest level since the market bottomed in October 2002.  Other sentiment surveys have reached similar negative extremes and have turned more bullish over the last week, indicating that the negative sentiment is now "unwinding".   

We can see a similar trend in the CBOE put/call ratios, as well as the ISE call/put ratios.  Both reached negative extremes and have now turned more bullish.

However, price action remains very weak.  The NASDAQ and NDX both have fallen back into consolidation patterns rather than continuing the break out of two weeks ago.

In addition, relative to the S&P 500 and NYSE continue to outperform the NASDAQ and NDX.  In strong markets, the NASDAQ and NDX should be leading the way higher, not lower.

Finally, it looks like investors remain wary of taking on risk.  I monitor the ratio of the Semiconductor Index versus the Consumer Staples Index to get a sense of when investors prefer risky versus safe equities.  On the chart below, when the line is rising, investors are bidding up Semiconductor stocks and taking on risk.  This should be a positive for the overall equity market.  However, when the line is falling, as it is now, investors are preferring the safety of consumer staple stocks. 

So while sentiment is negative enough to mark a bottom, price action hasn’t participated.  This dichotomy suggests the market will remain in a trading range.