Trader’s Narrative

The CBOE equity only put call ratio finally reached an extreme yesterday. This is the indicator which gave me a false alarm earlier. I’ve double and triple checked the data this time to be absolute sure.

Fear & Loathing
At the risk of sounding like a skipping record, this is an indication of a very oversold market. The put call ratio shows that there is some despondency in the options market, finally, as people rush to buy more puts and position themselves for a further decline. This is what we’d want to see because it indicates capitulation and creates a foundation for a rebound.

To see a higher put call ratio we’d have to go back to August 2004. Back then it reached 1.28 while now it is at 1.08. I’d like to see the ISEE sentiment index confirm this fear but since they measure slightly different option market activity, it may not.

To The Extreme
In any case Tuesday’s decline created further extremes in almost all technical indicators. For example, the percentage of S&P 500 stocks above their 50 day moving average decline to 14.20, which is a level at which it hasn’t been since the bottom of the bear market.

But we must defer to price action, not indicators. And while indicator after indicator has pressed into extremes which have seen the market bounce back before, the price action continues to be flaccid. That should also count as much as any indicator.