Interesting article, especially towards the end where the put ratio is discussed.
Source: The New York Post Saturday 22-98.
WHITE-KNUCKLE RIDE
By JON ELSEN and ANGELA C. ALLEN
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Queasy does it.
The Dow plunged as much as 283 points yesterday before a late-day rally slashed the deficit to a more settling 77.76-point decline to end the day at 8,533.65.
Blue chips' roller coaster ride culminated a world-wide slump that kicked off in Europe during the early morning hours on growing fears of the crumbling Russian economy and then spread across the Atlantic to the fragile emerging Latin American exchanges.
Uncertainty over the impact the U.S. bombings on terrorist sites in Afganistan and Sudan didn't help jittery traders.
(Yesterday's) drop really reflected political as well as the military situation, James Maguire, chairman of Henderson Brothers Inc., told The Post outside the New York Stock Exchange yesterday.
The political problems of the president along with the military situation just sort of raised investors' concerns and caused a bit of a downturn, he added. But the most important thing is the market continues to prove its resiliency after sharp sell-offs. The volatility we've seen in recent months is part and parcel of the market.
Banks such as J.P. Morgan & Co., Citicorp, and Chase Manhattan Corp. led declines because of the expectation they'll suffer big losses in emerging market debt and loans.
Shares in J.P. Morgan fell 3716 to 119, Citicorp dropped 4 to 134516 and Chase dipped 11116 to 6311 16.
International turmoil may have wreaked havoc on stocks, but it did wonders for the U.S. bond market which posted its biggest gains in two months. Yields, which move in the opposite direction of price, hit an all-time low of 5.38 percent, before closing at 5.44 percent.
Despite the sell-off in stocks, the Dow still managed to post a 108-point gain for the week - thanks in part to a nearly 300-point surge on Monday and Tuesday centered on President Clinton's admitting to an affair with Monica Lewinsky.
In broader market trading, the S&P 500 fell 10.42 yesterday to 1,081.18 and the tech-heavy Nasdaq composite lost 34.84 to 1,797.61.
Attention is now fixed on the political arena, especially what is going on in the anti-terrorist campaign and what's going on in emerging nations, said Michael Metz, a managing director at CIBC Oppenheimer & Co.
I think there is a mini-panic here, Metz added.
But those on the stock exchange floor disagree.
This not a correction. 100-to-200 points is standard, said trader Gary Schaffer, trader. Get used to this. This is how it is going to be. There was some fear of the Russian Index, the Indonesian Index and India. It was a case of the Asian contagion.
Added floor broker Steve Brustien: You're going to have dips and ups and downs. You have to stay calm.
Furthermore, options investors increasingly are speculating that stocks will extend their slump in coming weeks, by one market benchmark - and their pessimism could be good news for equities.
That's the prediction of analysts who watch options buying to keep track of what the majority of investors do - just so they can go the other way. These contrary-minded experts see pessimism as good for stocks, because it implies that investors are accumulating cash as they wait for the market to improve.
Ratios calculated by the Chicago Board Options Exchange show that investors bought lots of put options in recent days - the most since 1995, by one measure. Puts give the right to sell a stock or index by a specific date at a specified price, so buyers make money when the security falls.
On a contrarian basis, we have the makings of a big move to the upside, said Michael Schwartz, chief options strategist at Oppenheimer & Co.
The put/call ratio is simply put volume divided by call volume. Calls are the opposite of puts, giving the holder the right to buy. Investors who watch the ratios say a value greater than 1 signals that most speculators are pessimistic about the market and expect stocks to fall. That value can be used as a signal to buy.
Values less than 1 indicate that optimism is the ruling sentiment, suggesting that investors may be fully invested and have little cash on hand to propel stocks higher. The big market declines in October 1987 and October 1997, as well as the drop on Aug. 4 of this year, all were preceded by rising optimism that was reflected in call buying.
Just as optimism was overabundant in late July this year, before the market began a monthlong decline, pessimism is now getting out of hand, contrarians say.
The CBOE calculates a number of put/call ratios using indexes and equities, as well as a composite of both.
Each analyst favors one particular ratio and has their own interpretation of the critical value at which sentiment shifts from bearish to bullish. Merrill Lynch & Co. chief market analyst Richard McCabe, for example, follows the CBOE's Put/Call Composite ratio using a 25-day average.
In the 10 days before the 554-point, or 7.2 percent, decline of the Dow Jones industrial average on Oct. 27 last year, the Composite Put/Call ratio traded at an average of 0.66 on the CBOE, according to exchange data - a sign to McCabe that speculators buying options were bullish.
Similarly, in the seven days before Oct. 19, 1987, when the Dow average fell 508 points, or 23 percent, the composite ratio averaged 0.92, indicating that options investors were bullish.
This year, when the Dow peaked on July 17, the composite put/call ratio was a low 0.56. The index has since lost almost 9 percent, at one point falling 10 percent and meeting the accepted definition of a correction.
Yesterday the composite put/call index closed at 1.20, its highest level since March 22, 1995. The Dow rose 12 percent in the three months that followed that 1995 peak. It went on to gain 33 percent for the year, its best performance in two decades.
The numbers are building up, indicating there is more pessimism than caution - which says the market has made a short-term bottom, McCabe said.
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