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The US stock market, as measured by the S&P 500, is currently about 10% lower than its all-time high, which was reached on the 11th of October 2007. This is a huge move given how short a period 6 weeks is in stock market terms.

As a result, it’s no wonder that almost every market indicator out there points to a deeply oversold market. However, one popular, and fairly reliable, indicator does not confirm that the selling is done. The put/call ratio 20-day moving average is currently at about 1.08, which is well below the recent levels that coincided with market bounces. Strong bull moves have usually occured when this indicator has been at the 1.20 level.

The current low reading for the indicator could be seen as not enough fear in the market. Historically, market bottoms occur when fear has reached relatively extreme levels.

Put/Call Ratio 20-Day Moving Average

Comments (2)

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1. Scott said:
Monday, 3rd Dec 2007 at 1:30 am

I may not know what i am talking about but i will give it a try.

if you look at the index put/call ratios for 5 day averaging over 3 years, you will notice that at the end of just about every month up till the recent run up, there is a spike in the ratios. I think that can be interpreted, especially in indexes, as the end of the month window dressing spike of large funds buying married puts positions on entry to the market to reduce risk.

Starting in the most recent run up, you will first notice the absence of this spike. This seems to be happening coincidentally with strong divergences in several indicators, most notable the 5 – 20 day smoothed above ema charts. And this divergence is noticeable on macd charts also, a more common indicator that almost everyone knows how to interpret.

I am interpreting this as smart money not establishing new positions. The postulated net effect on that would be that longer period put/call ratios would be depressed. Which is exactly what we are seeing. If you back IN the lack of new money, the fear indexes would be through the roof as in other market corrections/declines.

If i am understanding this right, I am most concerned at the moment with there being no new money at the end of nov. I postulate that if the markets can hold up on a retest of the upward long term technical support (nasdq), we should see a spike in put/call ratios. And that would indicate a supportable local bull run. if this test fails, we will move into a longer cycle bear market.

2. scott said:
Monday, 3rd Dec 2007 at 1:59 am

Oh, I forgot to mention that just about anyone looking at 1 year charts of the Dow, and SP can see that we “Might” be ranging from aug lows to Nov highs. This would lead many to NOT buy puts on the expectation of a bounce off the lows. And this could be another explanation of why the fear indexes are not sharply higher at the moment. It also would explain in large part why the recent rally was so aggressive.

I am very concerned about what this means to market direction. If i would hazard a complete guess, Institutionalized bull markets, which this behavior suggests might be happening, would probably lead to more sever bear corrections when/if long term upward technical support is broken.

I normally do not put my opinions out in the public like this, but this issue mentioned above has been plexing me for sometime now.

These are strictly my opinions, you probably should just ignore them. please be very careful out there.

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