Jeff’s Note: Last night, I shared a brand-new strategy you could use to get paid every day the market is open. It only requires one ticker and one trade, per day.
And I explained why I see pain ahead for stocks this summer…
To catch the replay now, click right here.
Traders are placing big bets on a summertime rally.
They were jumping all over each other to buy call options on Tuesday. The CBOE put/call ratio (CPC) closed at 0.74 – its lowest level since last November. And, it’s just one more warning sign of a frothy market.
Long-time readers know we use the CPC to help gauge investor sentiment. It’s a contrary indicator – meaning when everyone is bullish, we want to be cautious, and when everyone is bearish, we want to be buyers.
Here’s the chart…
The stock market rarely rewards the popular opinion. So, whenever the CPC reaches extreme levels, it’s often profitable to bet on a short-term reversal in the other direction. If the CPC pops above 1.2 – meaning folks are rushing to buy put options – it usually pays to be a buyer of stocks.
And, when the CPC dips below 0.80 it’s often a warning sign of an impending pullback.
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Of course, no signal works 100% of the time. The CPC dipped below 0.80 in early June, yet the S&P 500 rallied nearly 200 points last month. So, I’m not suggesting readers sell everything just because the CPC is below 0.80.
I am suggesting, however, that now is a good time to be cautious.
Raise your stop-loss prices. Maybe trim some positions and take some money off the table. And avoid chasing stocks higher into extremely overbought conditions.
By itself, a low CPC isn’t a reason to bet aggressively that the market will fall. But, when you also consider the low level of the Volatility Index (VIX), the wildly bullish investor sentiment (a contrary indicator), and the high-priced valuations of the major stock market indexes, a low CPC is reason enough to be cautious.
Remember, the stock market rarely rewards the popular trade. And, with everyone buying call options earlier this week, the popular trade is to be bullish.
Best regards and good trading,
Jeff Clark
READER MAILBAG
Have you been cautious of the extreme bullishness lately?
Let us know your thoughts – and any questions you have – at [email protected].