As I'm sure you know, the Put/Call Ratio is the number of put options traded divided by the number of call options traded. The logic is simply that as investors get more confident the market is going up, they buy more call options. As they get more bearish on the market they buy more puts. So, the put/call ratio increases as investors become more bearish and decreases as they become more bullish. The indicator can viewed inversely, suggesting that the more bullish investors are the more likely the market is near a local top.
The historic range for the last 6 years or so has been between 0.4 and 1.2. So, in general we expect the market to be topping when we see low values like .52 as we saw yesterday.
stockcharts.com[e,a]waclyyay[d19970101,20030418][pb52!i][vc60][iUb7!Ua20,26,9][J6534876,Y]&pref=G
However, the analysis I've done on the indicator suggests that there is not a specific value for the indicator that will yield a statistically valid buy or sell or signal for the market over the 2-6 week time frame I am trying to predict. Many people say that the equity put/call ratio does provide valid market signals.
cboe.com
Using the equity put/call ratio might tend to be a better view of the sentiment of individual investors who typically get bullish at market tops and bearish at market bottoms.
In my model, I don't use the put/call ratio as using it would cause me to miss some significant market moves. However, I've found that when my timing model makes a call to buy or sell that is too early, if the put/call ratio later reaches an extreme it is a pretty good indication that my model's signal is still ok, just was too early. For instance, since my model is now at 50% short, it is comforting to see the put/call reach a low value.
So, even if the market continues up for a week or two and my short position is underwater, I'll be less concerned as long as we are seeing some low put/call ratios on the up days.
Tom |
