Strategy Central

[Walkingshadow]

Hi Rich,

Here's the put/call I like to use. Some people prefer the equity put/call ($CPCE), and there are reasons why that ought to be a good indicator. Personally, I find the CPC to be a better indicator. As you probably know, this sentiment indicator is only valuable at the extremes, which I define as greater than 0.95 or less than 0.75. I ignore the daily spikes, and only look at the 10 sma and 21 sma. Preferably, they should both exceed the extremes, but sometimes only the 10 sma will exceed the limit in a quickly pivoting market (e.g., early January of 2006). Also, you can see that not infrequently, this is a leading indicator, and price may not respond for a week or two.

The situation in late 2004 was interesting... the put/call exceeded the limits and reached a peak (10 sma) in early to mid-November, when there was no evidence yet of technical deterioration. It was only a week or so later that bearish divergence began to develop, increased thereafter, and that was followed by the intermediate-term correction that began in mid- to late Dec. 2004.