What, Us Worry? No Fear in QQQ Options
By Christopher Johnson
3/26/2002 11:25 AM ET
The QQQ single-day volume put/call ratio is a tool that compares the daily put volume to daily call volume in the front-three month options. When the volume of puts outweighs the volume of calls, the ratio moves higher signaling pessimistic investor activity. Conversely, when calls outpace puts, the ratio moves lower, indicating that investors are looking forward with an optimistic view. Extremely high readings of this ratio have been indicative of short-term strength for QQQ shares. On average, this single-day ratio checks in around 1.85, meaning that there are 185 put contracts traded for every 100 call contracts. Yesterday's single-day volume put/call ratio for the QQQ's came in at a low 0.63, especially when you consider that the QQQ's were down over 3.5 percent yesterday.
While single low readings of this indicator have not historically had consistent bearish implications for the tech-heavy index, a recent study done by our Quantitative Analysis Department shows some interesting results for consecutive low readings of the ratio. Yesterday's reading accounted for the seventh consecutive reading below 1.0 for the QQQ single-day volume put/call ratio. There have been eleven other occurrences in which the ratio has been able to achieve at least seven readings in a row below 1.0 (Table 1 displays these dates.) On average, after these readings, the market has performed poorly with respect to the at-any-time returns for QQQ shares since inception (which aren't too grand themselves.)
{See chart @ link}
The bottom line of this story is that investors continue to slide willingly down the slope of hope. While today's activity in the market may be attributed to a knee-jerk reaction to the release of the surprising consumer confidence numbers, tomorrow's will continued to be driven by the amount of investor optimism that remains in the market. It is important to note, that market bottoms are rarely formed while optimistic sentiment runs wild (as would be the case with these consecutive low readings). Instead, bottoms are normally formed as investors react to adverse market conditions by moving these ratios to extremely high levels.
- Christopher Johnson
schaeffersresearch.com |
