Sunday, June 22, 2008

A Look at Bearish Stock Market Sentiment


The trading of options on equities rather than the equities themselves has become increasingly popular among retail and prop traders. This makes the equity option volumes particularly relevant as market sentiment measures.

We can see from the chart above that spikes in equity put volume have accompanied recent intermediate-term market lows. With the latest pullback in prices in the S&P 500 Index (SPY; blue line), we can see that the four-day moving average of put volume (pink line) is once again spiking. While this doesn't mean we can't trade lower, it has recently been associated with price reversals over the intermediate term.

RELEVANT POSTS:

Sentiment and Relative Options Indicators

Sentiment and the Relative Put/Call Ratio
.