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This Signal Could Mark the End of July’s Gains

Watch this ratio to predict a market downturn...

All of those folks who were buying put options at the end of June are feeling some pain today.

Back on June 28, while the S&P 500 was testing support at the 2700 level, the CBOE Put/Call ratio closed at 1.32. In other words, traders were buying 32% more put options than call options.

That’s a sign of extreme pessimism. And from a contrarian standpoint, it’s bullish…

Yesterday, the S&P 500 closed at 2807. That’s a gain of 107 points – or roughly 4% – in just over three weeks. So far, July has turned out to be even more bullish than I expected it to be. But it appears we have probably seen the bulk of the gains for this rally phase.

You see, the same indicator that was pointing to a rally three weeks ago is not nearly as bullish. And if the market pops higher today – perhaps in response to Alphabet’s (GOOG) earnings report – then we could get a bearish signal.

Take a look at this updated chart of the CBOE Put/Call ratio….

In mid-June, the CPC dropped to 0.77 (the red arrow on the chart above). This told us that traders were getting a bit too optimistic. From a contrarian perspective, it was a caution sign. The S&P 500 was trading near 2750.

The market has had a tough time gaining ground from there. By the end of June, the S&P was flirting with the 2700 level.

But that’s when it seemed like everybody wanted to buy put options. The CPC jumped up to 1.32 (the blue arrow), and it set the stage for a bullish July – which has played out with the S&P 500 gaining 4% this month.

Yesterday, though, the CPC closed at 0.85. Folks are excited about buying call options and speculating on the upside again. That’s probably a bearish sign.

No… the CPC hasn’t quite hit the extremely low level that preceded the mid-June decline. But it is low enough to suggest that any immediate upside from here is limited. And if the CPC drops below 0.80 at the end of the day today or tomorrow, then the market might get hit with some selling pressure to close out the month.

Best regards and good trading,

Jeff Clark

Reader Mailbag

Today, a different take on the subject of yesterday’s Minute, “The Case for a Falling Dollar Is Still Strong”…

It would make sense that the USD has peaked except for the Fed’s $40 billion-per-month drawdown on its balance sheet. Looking at the SPY daily chart, you can see the Fed dumping assets at the end of each month starting in April (when they ramped up selling).

Market sentiment, the Japanese central bank (CB), or other CBs were pushing the market higher early in the month, but not enough to withstand the Fed’s flood.

– Roger

What factors do you see for (or against) a bearish dollar this summer?

Click here and let us know. And as always, send along any other comments or questions you might have, too.