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The Stock Market’s Most Extreme Bearish Sentiment Indicator: Not For The Squeamish

It’s the most bearish of the stock market sentiment indicators these days: the equity put/call ratio when looked at from a monthly standpoint. This is the one that demonstrates in one quick look the difference between the number of puts purchased on stocks and the number of calls purchased.

You don’t need an MBA from the University of Pennsylvania’s Wharton School to understand how this works and, right now, how it works is extraordinary. The monthly put/call ratio for equities traded is sitting at its most extreme reading in — can this possibly be correct? — yes, in at least 12 years.

Even if you stupidly cheated and paid someone else to take an SAT test in your place, you should be able to comprehend this:

Investors and traders buy put options if they think that stocks are about to down in price. They buy call options if they believe a rally is imminent. That’s the basic concept, although many different kinds of options strategies exist. Over the years, put/call ratios have been useful — not perfect — but useful to locate extremes.

The Chicago Board Options Exchange Equity Put/Call Ratio Index looks like this:

You don’t have to examine too closely or for too long to make out that in all the years seen on this chart it’s never hit a level this low. This index is showing that fewer equity puts and more equity calls have been purchased than at any time shown in the years and years indicated.

Naturally, one market indicator is not enough to make any decision about what to do with stocks. It’s impossible to predict how far investors might take a rally already underway. Price chart analysts have a number of measures to consider and looking at just one without considering others might be risky.

Nonetheless, it’s not often you see an indicator at the kind of extreme level that can be measured in years, not just weeks or months. In fact, it’s rare. It’s odd to see this go unmentioned in major financial media while NASDAQ-100 new highs are never missed.

The CBOE Options Total Put Call Index includes those traded on indexes in addition to equities and that chart looks like this:

This is not as dire looking at the equities-only index but it’s beginning to approach the levels of previous lows such as the late November , 2018 area. In any event, you can tell that put buyers have mostly gone away and that buyers of calls have mostly taken over.

Bull markets can continue to rally for longer than contrary sentiment indicators might suggest. That’s why it’s important to consider many different measures of sentiment and strength before making any decisions. Even then, it’s impossible to always gauge correctly what the outcomes might be.

To read more extensively about the concept of put/call ratios and similar measures, take a look at DecisionPoint Sentiment Indicators.

I do not hold positions in these investments. No recommendations are made one way or the other.  If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.

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