The YM (DJIA) has been weak for a few days. Didn't even wait for the 4:00 close before it started falling. Bounced off of 10091 which would be -12 to fair value. They're trying really hard to hold 1113.50 on the ES. Had over 4500 contracts on the bid, which is huge even for market hours, let alone after the close. And it gives way. Plunging now. 1112.00 and 10086. Both new lows for the day.
One of the reasons the market is both consistently interesting and persistently frustrating is that it is a "shape shifter." It undergoes changes in statistical properties. For instance, the 20-day moving average of the Put/Call Ratio was, for years, an excellent contra-indicator in the market.
During the period in blue (5/31/00-3/12/03), and for years prior to that, the chart above had a strong inverse correlation (-0.87 where 1 is a perfect and -1 is a perfectly inverse). When put trading built up to an extreme the market bottomed and when it dipped to a noticeable low the market topped.
During the rally off the bear-market lows (3/12/03-4/1/04) the P/C 20-dma changed properties, becoming much less volatile. However it still maintained an inverse correlation to the market (-0.43) albeit a weaker one.
Since 4/1/04 the put call ratio has become extremely unreliable. At times it appears to be a positive correlation and at times it seems to be all higgledy-piggledy. And indeed the 4/1-9/20/04 period shows us a 0.10 correlation (almost random) between the two series.
The market has undergone a significant change. But what is it? It appears that the level of put trading has become more related to the calendar than to market performance. My working hypothesis is that the huge increase in program trading and hedged positioning among institutional players has contributed to the deterioration of the inverse relationship between the P/C 20-dma and the SPX. And that the same factors have significantly contributed to the decrease in volatility to its lowest level in 8 years.
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