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Sunday, February 18, 2024 12:18:50 PM
A Very Accurate Sentiment Reading That Is Flashing A RED Light For Bulls
By: Tom Bowley | February 18, 2024
While many analysts follow sentiment signals that involve feelings about market direction, I prefer one that follows the MONEY. I want to know what retail traders are doing with their money with respect to options. Extreme readings provide eerily accurate reversals in trend, which are obviously very important to any trader. I like to call the 5-day SMA of the equity-only put-call ratio ($CPCE) my "speed boat" sentiment indicator as it's excellent at predicting SHORT-TERM reversals. I track the CPCE using the User-Defined Index (UDI) tool here at StockCharts.com. Over the past two years, there have been occasions (mostly during Q4 on Wednesdays) when hedge funds have bought a MASSIVE number of equity puts on many of the largest cap companies in the world, like Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Alphabet (GOOGL), NVIDIA (NVDA), Meta Platforms (META), Tesla (TSLA), etc. These equity puts need to be adjusted OUT of the ratio, because they do not reflect on the retail option trader. Here's my adjusted 5-day SMA of the CPCE over the past couple years:
The CPCE measures the amount of bullishness (low CPCE readings) and bearishness (high CPCE readings) in the options world. Extended periods of bullishness and bearishness are marked in the chart with red arrows and green arrows, respectively, as the 5-day moving average of the CPCE moves toward one extreme or the other. Any time that we see the 5-day CPCE reach the .55-.57 range to the downside (or lower), we can look for a possible short-term market top. Note that subsequent market declines may be quite brief, and sometimes very mild. The takeaway here is to realize that low readings, like the one we have right now, provide us a warning that the RISK of a market decline has increased substantially. Managing risk is a top priority for successful traders.
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By: Tom Bowley | February 18, 2024
While many analysts follow sentiment signals that involve feelings about market direction, I prefer one that follows the MONEY. I want to know what retail traders are doing with their money with respect to options. Extreme readings provide eerily accurate reversals in trend, which are obviously very important to any trader. I like to call the 5-day SMA of the equity-only put-call ratio ($CPCE) my "speed boat" sentiment indicator as it's excellent at predicting SHORT-TERM reversals. I track the CPCE using the User-Defined Index (UDI) tool here at StockCharts.com. Over the past two years, there have been occasions (mostly during Q4 on Wednesdays) when hedge funds have bought a MASSIVE number of equity puts on many of the largest cap companies in the world, like Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Alphabet (GOOGL), NVIDIA (NVDA), Meta Platforms (META), Tesla (TSLA), etc. These equity puts need to be adjusted OUT of the ratio, because they do not reflect on the retail option trader. Here's my adjusted 5-day SMA of the CPCE over the past couple years:
The CPCE measures the amount of bullishness (low CPCE readings) and bearishness (high CPCE readings) in the options world. Extended periods of bullishness and bearishness are marked in the chart with red arrows and green arrows, respectively, as the 5-day moving average of the CPCE moves toward one extreme or the other. Any time that we see the 5-day CPCE reach the .55-.57 range to the downside (or lower), we can look for a possible short-term market top. Note that subsequent market declines may be quite brief, and sometimes very mild. The takeaway here is to realize that low readings, like the one we have right now, provide us a warning that the RISK of a market decline has increased substantially. Managing risk is a top priority for successful traders.
Read Full Story »»»
DiscoverGold
Information posted to this board is not meant to suggest any specific action, but to point out the technical signs that can help our readers make their own specific decisions. Caveat emptor!
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