Did The CBOE Equity Put/Call Ratio Just Call A Top?

Something very rare happened yesterday and it could be a sign the masses are getting a little too excited about stocks.  Remember, when sentiment is too extreme, it can be a warning that the current trend is about to reverse.

The CBOE Options Equity Put/Call Ratio sunk to just 0.38 yesterday. This is the lowest reading in nearly 3.5 years and shows option traders had very little regard for puts on equities yesterday.  Now the big issue with this ratio is it doesn’t take into account just buy-to-open options, it also looks at sell-to-open options.  I’m aware of this and want to note it, so it just might not be the true read everyone is making it out to be.  None the less, here’s the chart.

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Going back to 2003, here are all the instances it was 0.38 or less.

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So is this truly bearish?  Well, I’m not going to reinvent the wheel here, my pal Jack Damn went over the charts last night.  BTW, if you don’t follow Jack, you are missing out.  

That first cluster in late 2003/early 2004 lead to a choppy 2004.  I’ve noted before I’ve seen a lot of studies lately show how we are looking like 2004 currently, here’s another one.  

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The early 2006 signal had a brief pullback, but the overall uptrend lasted five more months.  

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Next up, a low reading in mid-2009 did little to slow the uptrend. While the low signals in 2010 where mixed.  One was a great warning before some weakness, while the other marked the lows before a big rally.  

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Lastly, the signal in early 2011 (and most recent signal) came a few months before a brief sell-off.  But really it just lead to a choppy first half of 2011, until the big August drop due to Washington shenanigans.  

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Thanks again to Jack for doing those charts, makes my job easier.  Now what does this awesome review that Jack did tell me?  Bottom line, a low reading by itself isn’t some major bearish indicator, as just once did it lead to decent selling (April 2010).  

It is fun to talk about and try to figure out what it means, but as with most small sample sizes - results are just too random to conclude anything.  So that means don’t conclude this is bearish first and foremost.  

I’ll leave you with the 21-day moving average of this ratio.  I find this more meaningful and I’ve noted many times as long as this is trending lower, it is usually bullish. Now, it is getting rather ‘low’ - but the trend is the most important thing and it is firmly pointing lower.  Keep it simple.  

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  1. ryandetrick posted this