The above chart shows how spikes in the 20-day equity put/call ratio have corresponded to intermediate-term market bottoms. When equity options traders are bearish, it's paid to look to the upside for short-term returns.
Going back to 2006 (N = 519 trading days), I note that we've had 85 days in which equity put volume has exceeded equity call volume. Five days later, SPY has averaged a gain of .33% (50 up, 35 down). That is considerably stronger than the average five-day gain of .03% (238 up, 196 down) for the remainder of the sample.
When the daily equity put/call ratio has been below .60 (N = 41), the next five days in SPY have averaged a loss of -.03% (20 up, 21 down).
All in all, when the daily equity put/call ratio has been above .80 (N = 262), the average five-day gain in SPY has been .23%. When the ratio has been below .80 (N = 257), the average five-day loss has been -.07%. This has been a useful sentiment measure. At present, the ratio is .76, a six-day low.
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2 comments:
how much of an effect do you think "bond insurer's bailout" is having on this? I am not sure if that is measurable, if you were to try how would you go about it?
Hi,
It's very tough to gauge the impact of one particular financial theme on sentiment, but I've found the movement in the shares of the monoline insurers to be very helpful as a guide to intraday price direction for the SPX.
Brett
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