Robert, re: put buying: sorry,my server crashed again, but now everything seems to be back in order. here goes: heavy put buying can be useful both in confirming bottoms and the continuation of a rally. for instance, at the august 31 low, both the put/call ratio and the CBOE volatility (VIX) index were at extremes, showing that irrational fear had entered the market.the front month SPX 900 put was trading at $68 with the SPX at approx. 960. only a crash would have produced profits for buyers of this contract. the most important datum of that trading day though was that speculative call buying betting on a quick rebound had virtually ceased. it was this combination that suggested that at least a short term low was near.even so, it was certainly more prudent to wait for the actual reversal before taking a position as technical indicators of all sorts tend to be unreliable during a panic.it was much easier to validly interpret the october low, due to a host of non-confirmation signals. in the case of an ongoing rally a high p/c ratio shows both caution by longs putting on hedges (i'm one of those) as well as disbelief by speculative money, betting on a reversal. when the market advanced from the october lows,option traders were betting that it would turn out to be a 'sucker's rally' and continued to buy puts in droves. many other technical indicators were showing the market to be in overbought condition from the day of the surprise rate cut onward. it was only a few trading days before the market reached new record highs that the speculation started to shift in the opposite direction-and presto, a short term top was at hand.of course sentiment indicators should be used in conjunction with other technical tools before one forms an opinion. but i have found that during those times when other indicators *fail* to give clear signals on the next major move or cannot be reconciled with the direction the market moves in, they are extremely helpful.
btw, the biweekly futures traders' commitments report put out by the CFTC also deserves to be looked at regularly. if the large speculators hold a big net short position for 2-3 back-to-back reports a bullish signal is given. conversely, if they are net long for 2 reports in a row, upside is limited and a correction becomes likely. the report is not a precise tool for timing, but serves to confirm other sentiment measures.
hb |
