Stock market crashes come from out of nowhere. They happen when no one is looking. So I went into this past weekend completely confident that the stock market would not crash today.
“How are you not totally bearish right now?” a buddy of mine asked me in an email. “The biggest hurricane ever is about to hit Florida. And North Korea has a nuclear bomb. The stock market has peaked. I’m loaded with put options.”
I really didn’t know how to respond. As most of you know, I tend to lean bearish. I think the stock market is on borrowed time, and stock prices will be quite a bit lower two years from now than they are today. But going into this past weekend, I had no short positions.
I closed all of my short positions on the decline last Tuesday. And while I was tempted to add back some short exposure on Friday – just in case something crazy happened – I held off. The mere fact that so many other folks were looking for the stock market to move sharply lower today kept me on the sidelines.
You see, the stock market doesn’t crash when everyone expects it to. And it seems like just about everyone was looking for a crash today.
Just look at this chart of the CBOE Put/Call Index ratio…
This chart shows the ratio of the number of index put options traded divided by the number of call options. When the ratio is high, it means most traders are buying index put options. When the ratio is low, traders are buying call options.
Last Thursday, this chart closed at its highest level of the year. Traders were jumping over themselves to buy put options in anticipation of a negative event over the weekend.
The contrarian in me figured that with so many people betting on a bad outcome, we probably weren’t going to see it.
As I write this on Sunday night, S&P 500 futures are trading higher. Gold futures are lower. Hurricane Irma has caused a bit less damage than anticipated. And North Korea did not detonate another bomb.
Folks who bought put options on Thursday are likely to be under water on that trade today.
Keep an eye on the $CPCI chart, though. If it dips back down below 0.7 or so – where traders shift to buying many more calls than puts – then maybe we’ll finally get the bearish move.
Best regards and good trading,
P.S. Do you think the market has weathered the storm? Send me your responses – along with any other questions or suggestions – right here