Monday, April 12, 2010

Continued Bullish Sentiment: The CBOE Equity Put-Call Ratio

We are seeing unusual levels of bullish sentiment in the CBOE equity put-call ratio, with the lowest level of put buying relative to call purchases since the market rally began. Indeed, the excellent SentimenTrader site reports that we haven't seen such bullish options sentiment since 2000, which marked a very important stock market peak.

Meanwhile, we saw 301 new 52-week highs among NYSE common stocks, as reported by Decision Point, but that is down from levels reached last week. When bullish sentiment cannot translate into incremental market strength, that turns me cautious.


Dr Bill said...

Plus, two-year lows in VIX. Brett (or anyone else smart), I assume the VIX has a theoretical minimum of zero (e.g., no new option trades on SPX for 30 consecutive days), but what is the practical minimum for the VIX?

One more question: You note in an earlier post this AM (or noon) the absence of selling volume is a sign of little algo trading from the Big institutionals. What about the "street sweepers" (micro-arbitrage) adjacent to the exchanges probing buy/sell levels a few or so (100?) times per second?

--I'd almost surmise that during this past year, there is a slight bias (say, 52-48) over quiet periods to testing the upper range more than the lower range and, absent a meaningful reaction by the market, lets the in-house algos move SPY and the ES Minis up .1-to-.25% per day. A stronger opposing market response leads to more micro-arbitrage income, so probing need not be as frequent
until the selling wave passes its peak.
I'm not a conspiracy guy, but in order to control variance in market response (so that arbitrage via algo is profitable) , that bias must be present in a market period when BigVolume usually means lower prices--price discovery and all that.

In periods when BigVolume is usually associated higher prices, then I would assume the algo bias would be reverse in order to maximize arbitrage opportunities. Those don't happen as often, to be sure, or for as long, but the next down cycle might provide evidence of downside meddling--price discovery and all that. Fall 2008 was too violent and too voluminous to scope it out. I NEED more DATA!

The word Viscosity comes to mind when I see this pattern arise.

A good Tuesday to you.

Erick said...

@Dr Bill

What you describe sounds like a place I want to sink my retirement nest egg into. Yeeesh!

Steven Brooks (The Econoclast) said...

A reasonable average for the VIX over the last 10 years is around 20. It's low over that period was 9.39 in December of 2006. It hung around 12 for two years beginning in 2005. It's current level, 15.59 is near the lows of the last two years, but that period has seen the highest level of sustained volatility since we began measuring it. I watch it all day, every trading day.

The current level is low by current standards, but hardly unprecedented. It's reminiscent of the period from 2004 - 2007. If you believe we are back to "normal" this would be a reasonable volatility level. If you think we are in the eye of a storm, this level would have you nervous.