It seems like just about everyone is looking for stocks to crash.
The financial television talking heads – the greatest influence on retail investors – are leaning bearish.
Clearly, it’s having an effect… Investor sentiment surveys are reporting far more bears than bulls.
That means right now, traders are jumping over each other to buy put options.
Take a look at this chart of the Chicago Board Options Exchange (CBOE) options total put/call ratio (CPC).
The CPC is a short-term contrary indicator. It compares the volume in call options to the volume in put options.
A reading below 0.8 (horizontal red line) shows extreme bullishness. This happens when folks are buying a lot more calls than puts.
A reading above 1.2 (horizontal blue line) shows extreme bearishness as speculators jump over each other to buy puts.
The CPC jumped above 1.2 on Wednesday.
Meaning, as the stock market declined to its lowest level in nearly four months, traders were buying put options and betting on even more downside to come.
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But, as we pointed out earlier this month when the CPC spiked above 1.2, the market typically doesn’t reward the popular trade in the short term.
In fact, the CPC has spiked above 1.2 three other times over the past six weeks. That surprised investors who expected a further drop.
Here’s a close-up view showing how the S&P 500 behaved following each of those times.
In each case, the stock market rallied almost immediately. The S&P 500 recovered much of what it lost in the decline that led to the spike in put option purchases to begin with.
If the market follows a similar path this time, then stocks should be higher over the next several days.
Add on what we’ve seen from the VIX signal (I wrote about that yesterday), and there’s a lot of potential for a strong short-term bounce to kick off the month of October.
That doesn’t mean the intermediate-term decline phase the stock market has been in since late July is over. But so many folks are looking for a crash right now.
Since the stock market rarely rewards the popular trade, we’re probably due for a bounce over the next few days.
Best regards and good trading,
Are you anticipating a bounce?
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