Data Diary

CBOE put/call ratio – a post-humous indicator of health

Posted on 24 November 2009

We do not have the equivalent of the CBOE put/call ratio in Australia.  Pity.  It’s a pretty interesting indicator of the market’s mood.  Consider the following chart that highlights the 10 day moving average of the put/call ratio.

Some observations of this errant nave:

1) Has been a relatively reliable indicator of turns in the market, in particular, if it breaches the 0.50 – 0.80 range.  (Easy to say in hindsight, it’s a tad more difficult in the heat of battle.)

2) The relationship broke down with the introduction of QE.  Guess that is not so surprising as once the government had whispered to the clone army that they were going to help them out, well it just made sense to buy a few calls.

3) While QE was still the play of the day after the March 2009 low, the relationship seems to have normalised – as evidenced by the run up to 0.80 in the ratio that coincides with the July weakness in the market.

Question is what is happening right now?

Is there another leg lower in the ratio to come as the market sprints higher one last time?  Is the recent higher high & higher low in the ratio just another bloody non-confirmation of the latest S&P500 new highs?  Or is it that with the ratio around it’s long term average of 0.60, the market can sneak quietly higher in its hush-puppies ad infinitum?

For mine, I’ll get interested if it breaks the downtrend that has prevailed since Nov last year.  More to the point, if we do get a snap lower through 0.50 again, then that will be as good as signal as any that a quick reversal is on the cards.