Trader’s Narrative

Over the next few months and even till the end of the year, I’d be willing to “forecast” that we will close higher, but for the next few days and weeks, the market may be heading into some kind of a short term top or choppy trading.

I was looking over some different indicators to take the pulse of the market when I noticed that according to the ISE Sentiment there are too many calls being bought compared to puts right now.

In fact, the ratio is at levels which have in the past marked market tops. As you may recall from the last time I talked about the ISEE data, it only measures opening long customer transactions on International Securities Exchange. Which makes the data very useful, especially considering the growing volume of options traded on the ISE.

Take a look at the graph below which compares the S&P 500 to the ISEE sentiment data. As you’ll notice, when the 10 day moving average rises too much (too many calls bought to open, compared to puts) the market has a hard time powering ahead. It either swoons or enters into a sideways range.

There’s no magic to the number 10 by the way. Any short term moving average would smooth out the data and show you the same thing (more or less).

On Friday, the market was jolted down quite harshly. Although the move printed a wide range candle on index charts, it did not result in any sort of oversold readings. So the market certainly has room to the downside. And you have to remember that a bull market never makes it easy. It bucks at every chance to try and throw you off.

If we do see some general market weakness though, I’d really be wary of the soft sectors like the financials. The banks and brokers will most probably get the brunt of any serious selling since they are already very weak relative to the market.

Click to Enlarge Graph: