Saturday, May 12, 2007

The Equity Put/Call Ratio Traces a Wall of Worry

Here we see the 15-day equity put/call ratio (pink line) plotted against the S&P 500 Index (blue line) from January, 2004 to the present. Note how spikes in the options ratio have marked excellent intermediate-term buying opportunities during this period.

Perhaps even more interesting, observe how we've been riding a wall of worry during this bull market. We've been tracing out higher lows and higher highs in the equity put/call ratio. While some have referred to this market as a "bubble", it is difficult to make the case that we're seeing excesses of optimism that would be characteristic of a market peak.

With respect to the present market, we can see that troughs in the put/call ratio have tended to precede price tops during market swings. We've yet to see such a trough in the recent market, suggesting that we could have further to go on the upside during this swing.


Market Psychology: Why It Is Important

Assessing Market Psychology With Relative Options Indicators

A Different Way to Measure Market Sentiment