The hottest market timing indicator of the past two years has been running cold lately.
Up until this past month, buy and sell signals from the Chicago Board Options Exchange (CBOE) put/call ratio (CPC) had been spot on. Every time the CPC popped above 1.20 – indicating traders were buying far more put options than call options – the stock market hit at least a short-term bottom. And, each time the CPC dipped below 80 – meaning folks were buying far more calls than puts – the market hit a short-term high.
The stock market rarely rewards the popular opinion. So, whenever the CPC reaches extreme levels, it’s often profitable to bet on a reversal in the other direction. Indeed, using the CPC as a contrary indicator has paid off quite well over the past two years.
Over the past month, though… not so much.
The CPC dipped below 0.80 several times over the past few weeks. Take a look…
This sort of condition ought to lead to at least a short-term pullback in the stock market. But, it hasn’t happened. The market just keeps powering higher.
As I said, it’s rare for the market to reward the popular opinion. But, that’s what’s happening.
Buying call options is paying off.
This same sort of thing happened back in January 2018. Folks may recall that as another period when stock prices just kept pressing higher day after day.
The market was melting up. And, traders were buying call options into that action.
Here’s how the CPC looked back then…
The cluster of arrows in January of 2018 looks remarkably similar to the cluster of arrows on the chart today. So, it might be useful to take a look at how the S&P 500 performed in February 2018 to get some clues as to what might happen in the weeks ahead.
Look at this chart of the S&P 500…
The relentless move higher in January 2018 was followed by an even more powerful decline. The S&P 500 lost about 12% in less than two weeks. So, while the individual “sell signals” from the put/call ratio didn’t pay off immediately, the cluster of sell signals warned of an impending strong decline.
The stock market action today sure looks similar to the action back in January 2018. And, the cluster of sell signals from the CPC looks similar as well.
None of the recent sell signals have paid off yet. That has lots of folks wondering if the CPC is no longer a useful
Of course, many folks thought that back in January 2018 as well.
Traders shouldn’t be too quick to dismiss the CPC. It may be warning of something more dramatic than a simple, short-term decline.
Best regards and good trading,
Today, Delta Report subscribers Harvey and Stephen thank Jeff for the value of the service…
Almost all of the “thanks for your commitment to our financial lives” emails to you are well-deserved, and I am sure your efforts exceed those when you were trading in the past. I became a subscriber and that dedication led me to become a lifetime member. Thanks Jeff!
Hi Jeff, I joined your service early last year and greatly appreciate all the advice and recommendations. I’m working from a smaller base, so my buys have been fairly small at 6-10 contracts. But, I recently paid for my lifetime subscription.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].