Wednesday, January 15, 2014

Put/call ratio at very low level

The following chart is concerning. It shows the 3-month moving average of the equity put/call ratio (red) vs. the S&P 500 (black):

Source: Stockcharts.com

This put/call ratio has not been this low since early 2011, just before the S&P 500 peaked. In general, when this P/C ratio reaches levels below 0.60, it indicates a market stretched to the upside with investor sentiment excessively optimistic and frothy. Typically the market consolidates or corrects at these junctures. The timing isn't perfect -- it often is not when it comes to sentiment indicators -- and I prefer to wait for this P/C ratio to meaningfully turn up to get a more accurate bearish signal.

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