This morning someone on Fox Business Channel made it clear just how extreme the put/call ratio has gotten. I don’t usually pay much attention to this indicator because it’s difficult to interpret, but when I looked at it this morning, it was certainly a wake-up call. Our main interest is the CBOE put/call ratio, but I’ve also included the equity put/call ratio because it’s so far outside of its normal range. To calculate the put/call ratio, divide the number of puts by the number of calls. High readings indicate excessive bearishness and the current readings are the highest on record. We can see on this chart that in the past five years, high values have occurred at key market lows.
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Historically, prominent ratio spikes typically occur at significant price lows. Some exceptions are: (1) the end of the 1994 consolidation and (2) the extreme ratio value in 2007 near the bull market top. The equity put/call ratio has also been at extreme highs for over two months. How and when should one react to this?
Conclusion: The current high put/call ratio readings reflect extremely high bearish sentiment. Such extremes typically mark major price lows, and it would pay for bears to remain alert to their heightened vulnerability; However, this indicator is not infallible or precise. Be careful regardless of your inclinations.
-Carl Swenlin
Technical analysis is a windsock, not a crystal ball. -Carl Swenlin
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Karl Swenlin is an experienced technical analyst who has been actively involved in market analysis since 1981. A pioneer in creating online technical resources, he was President and Founder of DecisionPoint.com, one of the Internet’s leading market timing and technical analysis websites. DecisionPoint specializes in stock market indicators and charts. Since DecisionPoint’s merger with StockCharts.com in 2013, Carl has served as a consulting technical analyst and blog contributor.
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