Sunday, January 13, 2008

Relative Sentiment and the Equity Put/Call Ratio

One implication of the recent post on psychological relativism is that absolute levels of sentiment are less important than shifts in sentiment from recent norms.

In the chart above, we see the five-day equity put/call ratio as a proportion of the 65-day ratio. When the pink line is above 1.0, it means that we are bearish relative to the past 65 trading days; when the line is below 1.0, it means that we are bullish relative to the most recent 65 days. Note how we've seen elevated relative bearish sentiment at market bottoms in 2007 and relative bullishness at intermediate-term peaks.

One very nice application is that you can monitor the current day's equity put-call ratio as the day unfolds and see if traders overall are more or less bullish than they've been over the past 65 days. Interestingly, in the wake of the Fed comments, sentiment for the past two trading sessions has been more bullish than the 65-day average. Friday's decline was notable in its lack of bearishness in that regard.


Spikes in the Relative Equity Put/Call Ratio

What We Can Learn From the Equity Put/Call Ratio

What Drives Investor Sentiment?


Jeff Pietsch CFA, Esq said...

Cumulative & Daily Tick also looked very positive. Seemed like perhaps the recent "dogs" were being broadly bought as the large-caps "stars" brought down the indices. Remployment of capital?

Brett Steenbarger, Ph.D. said...

Hi Jeff,

Yes, there did seem to be some long/short unwinding late in the week. The strength in the TICK, which I mention in my latest indicator update, along with some shrinkage of new lows, had me cashing in short positions Fri PM.