Traders are jumping all over themselves to buy call options again.
The CBOE Put/Call ratio (CPC) closed at just 0.69 on Wednesday. That’s one of the lowest readings of the past year. And, it’s just another reason for traders to be extra-cautious right here.
You see, the put/call ratio is an outstanding short-term contrary indicator for the broad stock market. It compares the buying interest in call options to the buying interest in put options.
A reading above 1.20 shows extreme bearishness among speculators and can indicate a good time to buy stocks for the short-term. A reading below 0.80 shows extreme bullishness and could indicate a good time to sell.
We’ve looked at this indicator many times in the past, and it has proven to be quite accurate at timing short-term reversals in the stock market. So, the extreme level of buying interest in call options on Wednesday is a bearish sign.
Here’s the chart of the CPC…
We looked at this indicator back in January, just before the S&P 500 sold off at the end of the month. The CPC gave a whole cluster of warning signals in February. Traders likely remember what happened after that.
The CPC flashed another warning sign in mid-May. That was followed by an immediate 25-point drop in the S&P.
And now, the CPC is once again warning that bullishness is reaching extreme levels. Add this to the other caution signs – like the Volatility Index (VIX) trading near its lower Bollinger Band, and the McClellan Oscillator for the NYSE (NYMO) trading at an excessively high level – and
you have the setup for a fairly significant pullback.
At the very least, most traders should be a bit cautious here. Raise your stops on long positions and maybe hold off on making new purchases until some of the excessive bullishness dissipates. Aggressive traders should consider adding some short exposure to their portfolios.
Best regards and good trading,
Jeff Clark
P.S. As I mentioned, with the market jumping around as much as it is, traders need to proceed with caution – and guidance.
I’ve spent my career utilizing the strategies I layout in my 3-Stock Retirement Blueprint… especially in times like these, where volatility is so high. We need a strategy to make the smartest moves in this market.
With a Jeff Clark Trader membership, you’ll have access to the blueprint above, eight training videos, the first three sessions of my Crash Course, and a quarterly Q&A (the next of which will be June 22)… all for $19. Click here to learn more.
Reader Mailbag
In today’s mailbag, Ernest and Steve respond to last week’s Memorial Day feedback…
Jeff, I want to thank you for publishing Lee’s rant. I felt absolutely compelled to respond to it. As an old and dear friend of mine once said, “The ignorant yell the loudest.” A lot of blood was shed to get Lee into a position to publish such a rant against the government. For his safety, I hope he doesn’t move to Mexico, Venezuela, or Columbia and publish such a rant.
His rant reminds me of a couple of ideas: Is life so dear, or peace so sweet, as to be purchased at the price of chains and slavery? And to paraphrase Lincoln, “We cannot dedicate, we cannot consecrate, we cannot hallow Lee’s rights. Brave men, both living and dead, have done so far beyond our poor power to add or detract.”
I almost have your videos on options memorized and will be joining your FLIP Trade report shortly. Thanks.
– Ernest
Lee, you are absolutely correct. The Army should be defending the soil and people of wherever the country is located, instead of going into other countries and creating wars. Let the people decide if their government is worthy or not. Peace, that is all we want to be able to serve our Creator who is the provider for all living beings.
– Steve
And, Jeff Clark Trader subscribers share their experiences learning from Jeff…
For Jeff’s eyes, I am not a stock or options trader right now. But with Teeka Tiwari’s Palm Beach Confidential I’ve been exposed to the concept that, with some knowledge, the right direction, and some common sense, it’s possible to make a bit of money without working 80-hour weeks. It could even replace a stream of income.
I got a taste of Teeka’s Palm Beach Quant options service, and it resonated with me on an intuitive level that I too might trade options. I have been struggling for months trying to understand the basic concepts with information and tutorials gathered from the CBOE, Palm Beach Quant, Fast Fortune, TD Ameritrade, and other sources. I could only get pieces of the puzzle. Until I ran across your Jeff Clark Trader promotion. I hope maybe I can understand this one.
I want to tell you that your video tutorials are worth it – at any price. You explain the concepts in such a way that they’re understandable to a complete novice such as me. You tie them together with a continuity that gives both the detail and big picture that’s necessary to establish a solid foundation of understanding. And all in a concise but easy to grasp delivery. You could make a fortune just marketing these tutorials!
Because of you, I am beginning to stick my toe in the water with more understanding of what I’m doing, rather than simply following other recommendations, however profitable they might be. I have to know that what I’m doing works, and you provide that understanding so I can move forward and test myself in options trading. And I know it’s up to me to make this successful. Thank you, Jeff!
– Richard
Hi Jeff, I just joined a few weeks ago but I’m excited to make gains in the next few months.
My first order of business is to pay off my credit card debt. I’ll be over the moon and dancing an Irish jig when I accomplish that, and then of course pay off the cards each month. I hope to accomplish this within a year.
My trading goal now is to actually place the spread and synthetic trades that Jeff talks about in video eight of the training videos. Thank you greatly. I’m learning so much from Jeff.
– Todd
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].