One of things that worries me about the current market is the unusually low reading in the CBOE Put/Call Ratio (CPC). The red line in Chart 1 is a 5-day moving average of the CPC which smoothes out its daily trend. The put/call ratio is a contrary indicator. In other words, a high put/call ratio shows too much pessimism and often coincides with market bounces. High CPC readings last March and November (down arrows) led to bounces in the S&P 500 (green line). Low CPC readings during October 2007 and May 2008 (up arrows) led to drops in the S&P. At present, the CPC is trading near the lowest levels of the last two years. Given its track record as a contrary indicator, that’s a potentially bearish reading for the stock market.
Chart 1
Tags: Options