There is a school of thought that says today, the Thursday pre-expiration, is Misdirection Day. Whichever way we go today will run counter to the Expiration week direction. I have never seen a study proving or disproving that, so just throwing it out there.
More good news? Well, I’m not big on put/call numbers, but if you are, Rob at Quantifiable Edges offers up this.
The market finally broke its consolidation on Wednesday. One intermediate-term positive I’m seeing right now is the action in the CBOE put/call ratio. Today (yesterday) it closed at 1.16. Over the last 4 days it has averaged 1.12. High put/call ratios are normally associated with market selloffs, yet the market made a 20-day high as recently as Monday.
Relatively high levels of put buying are indicative of worry on the part of traders, which is why they are more common during selloffs than during upmoves. I looked back to check other times when the 4-day put/call ratio was above 1.10 and the market was within three days of a 20-day high. Looking back to 1995 I only found three instances: 8/23/06, 2/23/07, and 5/25/07.
Which highlights a point we have touched on before, but not lately. Put volume is relatively strong in recent month’s, especially when compared with the VIX. Normally you would expect put demand and increasing volatility to go hand in hand, but not so much any more. My favorite culprit is the prevalence of Inverse Funds, the theory being that owners of these now have a pocket full of Downside that lets them meet the put buyers at relatively lower prices.
Anyway, whatever the explanation, it doesn’t particulary matter. Rob continues.
If you enjoy the content at iBankCoin, please follow us on Twitter….It should be noted, though that the put/call ratio has been significantly higher over the past couple of years than it was in the beginning of the decade. To adjust for this I normalized the data by using the 100-day moving average.
I once again looked at any time the S&P 500 had made at least a 20-day high in the last 3 days. This time I only required that the four-day average put/call ratio was above its 100-day moving average. After eliminating overlap and looking out at least 20-days I found 47 instances going back to 1995. 33 of these led to positive returns over the next 20 days and 14 of them led to declines – a 70% win rate. The average win was 2.7% and the average loss was 2.5%. The average trade was 1.1%. Not overwhelming numbers by any stretch but not bad, especially considering the market was already at a 20-day high.
good post. thanks.
thank you.
interesting. Just curious, were you using the total put/call ratio or the equity only p/c ? Also, that other site you sometimes mention (the one that reports the ratio as call/put) often differs from the CBOE numbers. I’ve seen some other backtests suggesting that when the p/c ratio of an index (specifically OEX, SPX, DJX)reaches an extreme of 3 or so, a pullback is likely within a few days. Do you happen to have any insight on this? Thanks.
That other number is the ISEE. It is a little better in that it is only customer opening purchases that count, so it is theoretically the sort of trader you want to fade.
I believe he uses the equity number, but I will check. VIX and More definitely does, I believe this guy does too.
I don’t really know about specific numbers that signal anything in p/c. I would note though that *baselines* have changed over the past year, i.e. the put/call is just generally higher than in the past.