Those crazy speculators are at it again.
The CBOE put/call ratio (CPC) closed at 0.72 on Tuesday. In fact, it has closed below 0.80 almost every day this month. That’s an unusual situation…
And, it’s just one more warning sign of a frothy market.
Long-time readers know we use the CPC to help gauge investor sentiment. It’s a contrary indicator – meaning when everyone is bullish, we want to be cautious, and when everyone is bearish, we want to be buyers.
For the past week, folks have been jumping over each other to buy call options.
Here’s the chart…
The stock market rarely rewards the popular opinion. So, whenever the CPC reaches extreme levels, it’s often profitable to bet on a short-term reversal in the other direction. So, when the CPC pops above 1.2 – meaning folks are rushing to buy put options – it usually pays to be a buyer of stocks.
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And, when the CPC dips below 0.80 it’s often a warning sign of an impending pullback.
It’s rare for the CPC to stay at an extreme level for a prolonged period of time. The last time the CPC spent an entire month below 0.80 was last August. The S&P 500 rallied nearly 300 points during that time.
Traders were excited… And, they piled into speculative call options in order to maximize their gains.
But, the S&P 500 then lost nearly 400 points in September. The market gave back all of the August gains and then some.
So, as we approach the end of January – the end of a nearly month-long period of the CPC trading below 0.80 – we note that the S&P has gained 160 points so far this month. Traders are excited again… And, they’re piling into speculative call options in order to maximize their gains.
It seems prudent to wonder if the market’s rally will continue… Or, if this coming February might play out like last September.
Best regards and good trading,
Jeff Clark
Reader Mailbag
In today’s mailbag, subscribers George and Brad share why they’re not buying bitcoin in response to Saturday’s essay from Market Minute co-editor and analyst Eoin Treacy…
Eoin and Jeff, bitcoin pulled back because Janet Yellen said some things that exposed her ignorance regarding blockchain technology. If the current administration wants to label users of crypto as nefarious individuals, those investors may go elsewhere.
The rest of us will wait until the Biden people recognize that Yellen said stupid things. Patience grasshopper, patience. All the best.
– George
To answer your question, I won’t be buying the bitcoin dip. The short-term risk/reward ratio doesn’t seem to be highly favorable.
– Brad
And, Alliance member Pramila thanks Eoin for his insight…
Dear Eoin, your article is very insightful. Please keep them coming. Clarity and decision making really makes it easy to think about crypto trading. Thanks.
– Pramila
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming – and send us any questions – at feedback@jeffclarktrader.com.