Wednesday, April 15, 2009

Implications of an Extremely Low Put/Call

One indicator that has received some attention lately is the CBOE Equity Put-Call ratio. Many people believe that very low readings can be a sign of complacency and an impending top. I decided to test this out a little.

Below I look at the 3-day equity p/c ratio compared with the 100-day. To see why I normalize using a long-term moving average, click here. On Tuesday the 3-day average dropped over 25% below the 100 day. This has only happened a handful of times. To get a larger sample size I used a 20% trigger instead.

Based on the above test, the recent extremely low numbers in the CBOE Equity Put/Call ratio don’t appear to be predictive of a selloff. In fact, they could actually be interpreted as a short-term bullish indication.

1 comment:

Daniel said...

Sentiment of all kinds is currently irrelevant.

We are on a Breadth Thrust Continuation Signal, confirmed by all three versions of Breadth Thrust w which I'm familiar.

Breadth Thrust uber alles! Same as it ever was, and always will be. All new BULLs, like the one born 3/6, begin with a Big Bang effect, which then radiates for 'light years' upward and outward.

The only discretion is whether to HOLD the continuation signal for its full nominal span, or finesse it with some moving average crossover, as Rob suggested a few posts ago.

Surprises weigh heavily to the upside these days, both in price and in news. When that stops being surprising, then other signs that the continuation-signal strength is fading will be present, both in the omens and the momentum indicators.