Put/Call Ratio Sends Signal
The Put-Call Ratio is considered to be a measure of market sentiment. It is also believed to be a contrary indicator. The theory is that, if too many calls are being purchased, market sentiment is too bullish. This leads some to predict that a market decline is imminent. On the other side, if too many puts are being purchased, then market is too bearish. Consequently, some will predict that a market rise is imminent.
To calculate the Put/Call Ratio simply divide the number of puts by the number of calls. When the ratio goes over 1.0, it means that the total put volume (betting that stocks will fall) is greater than the total call volume (betting that stocks will rise). Historically, a put/call reading above .75 is generally viewed as a bullish indicator.
This is where things get bullish because last week was the only time in its history the total Put/Call Ratio closed above 1.0 for 6 days in a row. The old record stood at five days in a row above 1.0 and this was back in September 20, 2002. The ratio did also close above 1.0 for four days in a row back in mid March of 2004. Both of these streaks where the ratio closed four or five consecutive days over 1.0 was followed by a market bottom. This dip presented a tremendous buying opportunity as the major indexes subsequently rallied.
Could this new record of six straight days over 1.0 signal that another bottom is coming soon?
Investors Becoming Bearish
In this weekend's Barron's we couldn't help but notice that the AAII Index saw a huge jump in the percentage of people that are now bearish. These newly minted bears came from both former bullish and neutral camps. This is a strong contrarian signal that is telling us that the market may be due for rally.
The major market indexes needs to experience another week of volatility like the one we just had. This would send even more investors into their bearish mode. We will be looking very carefully to next week's AAII Index.
Conclusion
We spoke to a very successful fund manager today and talked about where the market was headed. Here is a brief summary of our conversation:
The VIX, Put/Call Ratio, and the increasing bearishness of investors all point to a short term rally. However, as our very intelligent guest pointed out, the geopolitical concerns are really hurting the fundamentals of this market. The fact that oil is now well over $40 per barrel is weighing on the American public in a major way. The scariest thing that keeps our fund manager up at night is the possibility of another terrorist attack on U.S. soil. More needs to be done to protect our country from sabotage and attack. Long term things aren't as clear but if you are a daytrader or short term speculative type then there is no better time then now. The huge swings are providing ample opportunities.
In regards to the pending interest rate hikes, our guest suggests that the concerns are more hype than anything else. With the Fed funds rate at historic lows what's the big deal with moving from 1% to 1.25% or even 1.5%. However, the media controls perception and can be very damaging to the current administration. When rates are increased the headlines could say Fed Funds rate increases 50% from 1% to 1.5% or it could say 50 basis point increases not a big deal with rate still at historic lows. It will come down to the American public's perception.
AI
