Sunday, July 27, 2008

What The Recent Put/Call Ratios Are Suggesting

With the increased difficulty created by the recent enforcement of short selling rules in certain financial stocks, it would seem that there may be a greater interest in put buying. This is because buying a put would be an alternative way to gain short exposure. What we’ve seen is exactly the opposite. Last Monday the CBOE Total Put/Call Ratio’s 10-day MA dropped below it 200-day MA. It continued to drop further below it all week.

In the past I’ve discussed the need normalize the put/call ratios. I began looking at the 10/200 MA ratio after reading some of Dr. Brett Steenbarger’s research on the subject. Dr. Steenbarger used the Equity P/C Ratio and looked for stretches.

In my case I do not require the 10-day MA to be stretched from the 200-day MA. I simply looked at how the market has performed when the 10-day MA is positioned either above or below the 200-day MA.

From 8/6/1996 through 7/25/2008 the S&P 500 has gained 595.44 points. When the 10-day MA of the Total Put/Call Ratio has been above the 200-day MA the S&P 500 has gained 710.31 points. When the 10-day MA has been below the 200-day MA the S&P 500 has LOST 114.87 points. Based on this I’d consider the recent cross of the 10-day put/call below the 200 day put/call to be a negatvie.

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9 comments:

Dave M. said...

Rob, how are you getting the data for Lowry's 90% upside-downside days? I'm especially interested in the "points" gained and lost on the NYSE. It is actually a proprietary method by Lowry's. I used to track the buying power-selling power index on my own and came close to replicating Lowry for many years, but I never was really able to get the "points" methodology to work to get the 90% days to analyze.

Rob Hanna said...

Dave,

It appears you are referring to the FTD & 90% day studies I included in this week's Weekly Research. For those tests I simply referenced the Lowry's paper, which list all 90% days. It is available for sale on Lowry's website.

Many times I will just use 90% volume if I run more complex tests. That is a very close approximation. I don't think you get the volume too often without the points.

Rob

Dave M. said...

Ok, but going forward, how would you imagine Lowry gets the "points" data? I've always wondered what data he refers to. It must be posted somewhere by someone?

Rob Hanna said...

Sorry Dave, not sure where they get the data. Perhaps someone else will offer up the answer.

Brent said...

Dave,

I think I am following you, but maybe not because the answer seems obvious and you may be looking for something else.

If you read again Paul Desmond's Charles H. Dow award winning paper from 2002 where he lays out Lowry's upside-downside strategy, you will see they are simply using NYSE up/down points (btw, this paper is available at mta dot org).

Personally, I prefer to use the population of common stocks with earnings estimate data (about 4400 total) for my upside-downside and highs v. lows market timing input, but that's just me...

Good luck!

Johan Lindén said...

If looking for data about hedging financial stocks, then CBOE put call ratio for EQUITY would be more true. If you want to hedge financial stocks you would buy put options for the stocks rather than the whole SP500 index.

It could be more interesting to do the study with that index instead.

Dave M. said...

Brent, thanks. I have had the Lowry 2002 paper since it first came out aOnd am very familiar with it. But I am still lost as to where to find the NYSE up/down points data. My previous searches for this data proved fruitless.

Brent said...

Dave,

I think you can do it in three steps.

1. Obtain a list of the NYSE component tickers
2. Obtain the daily point changes and sum points gained and points lost for all NYSE components
3. Divide points gained or lost(depending on whether it is an upside or downside thrust) by points gained + points lost

That should do it, no?

Brent said...

Dave,

Almost forgot. I know for sure Telechart has this data, I currently use Portfolio123 and IQfeed w/ Amibroker, which are two more potential sources of the data.

Good luck!