Options
optionstrategist.com
This has quickly evolved into one of the most oversold markets in history. Unfortunately, that by itself doesn't mean much, for there won't be buy signals until the bearishness peaks. Specifically, it means that we are still awaiting buy signals from the put-call ratios. The equity-only ratios are racing higher as massive put buying dominates option trading action. Most of the damage is contained in the NASDAQ arena, but it has certainly spilled over into the NYSE stocks, too.
The weighted equity-only put-call ratio now stands at an unbelievable 253! That means that $2.53 has been spent on puts for every $1.00 spent on calls over a 21-day period. That's a lot of money invested in puts. Admittedly, there has been a good deal of quasi-arbitrage where deeply in- the-money puts are trading in large blocks. Still, this is an extremely high reading for the ratio. Just last Tuesday, traders spent more than $7 on puts for every $1 spent on calls.
The normal put-call ratio is telling a similar story, although its not quite as extreme. This ratio now stands at 67 the highest level since the arbitrage-filled days of the 1980's. The breakdown of this ratio into its NYSE and NASD components shows that NASD put buying is the real culprit, as it has ballooned to very high levels, while NYSE put buying is nowhere near the peak that it registered last October. So, in some sense, we can say that NYSE bearish sentiment peaked last month, but NASD bearish sentiment has yet to do so.
All of these ratios continue to move higher, though. We cannot say that they are at "buy" levels because we use a dynamic interpretation buy signals will occur only when these ratios roll over and begin to decline. Such a dynamic interpretation has kept us out of trouble. Anyone using a "static" interpretation would have already figured that these ratios were high enough to be considered buy signals, for they are higher than they've been during the entire bull market. But now we are probably in a bear market, and things have changed "normal" put-call readings of 53 or 55 no longer engender intermediate-term rallies in the market. Apparently even 65 wasn't high enough to do the trick. Where will the next buy signal emerge from? No one knows for sure, but by using the dynamic approach, at least we know we won't be buying into the midst of a ferocious decline. By the time the 21-day moving average of the put-call ratios rolls over and signals a buy, it is almost certain that prices will have stabilized. In fact, we don't expect to catch the exact bottom, but we also don't expect to be faked out by a one- or two-day rally, such as we saw in the market last week.
Market breadth demonstrates, however, that the damage is being most heavily registered in the biggest NASDAQ names. Our oscillator stands at about minus 146, and it still has not fallen below minus 200. That seems almost unbelievable, but breadth has been relatively strong. Even today, with the Dow down over 200 points, there weren't even 900 more declines than advances.
In summary, expect violent rallies from time to time that last a day or two. If and when we finally see the put-call ratios roll over and decline, then we should be in good shape for an intermediate-term rally. |
