2009 Market Top - a chart to help know when to say when

Thanks to my friends at stocktock for giving me this idea.

I have attached a ratio chart of the Options Index put/call ratio over the Options Equity put/call ratio. I am not entirely sure of the reasons why it works, but looking at the chart you can see that it has helped confirm the downtrend of the last 2 years as well as the big rally we have had over the past few months.

Basically when this ratio is moving down, the index put call ratio is moving down quicker than the equities put call. The put call ratio is a contrarian indicator so I imagine this indicator is also a contrarian indicator. When it is moving lower you have less Index puts and more calls versus Equities which hav more puts and less calls. Exactly, very confusing.

The great thing about indicators is sometimes we don't even need to know why they work. Backtesting tells us that the indicator was valid and did work for the time frame analyzed, so it seems reasonable to add it to the arsenal as it may give a valid signal going forward as well.

I will be adding this to my watch list for the next major move. Notice the shorter term MA may be topping out as the market continues up currently.