Why this "downdraft" can get worse

The put call ratio is a contrarian indicator often used to help mark extremes in sentiment. The thought is that when people buy more puts than usual (and more calls than usual) then sentiment may be at an extreme. Right now a lot of people are looking at the spike up in put buying and concluding that the market's selloff may be extreme. They also may conclude as a result that the selloff will soon be over. However, I have other thoughts.


Im not that concerned about the put call from a bear perspective for a few reasons...

1) We aren't near 2008 panic levels from both an actual and a moving average standpoint. The 75 day Moving Average (blue MA line) is at .71 and it peaked above .8 during 2008 a few times. It stayed above .71 for over a year then. The actual put/call of 1.11 and 1.08 thus far was seen back in 08 and peaked even higher at 1.35, 1.18, 1.16 then in April and December of 2008. Notice the recent spikes were even higher than the Flash Crash telling me this is something worse.
2) The rise of the ratio has been faster than in '08, but our starting point was a lot lower (complacency a lot higher it seems). Also, the fall in stocks over the past month was extremely fast...much faster than the kickoff after 2007's top. The fact that the put/call ratio was so low in the first place were warning signs that bulls were getting too comfortable.
3) Some of the highest put/call ratio readings were actually nearer to the highs than the lows. Maybe this hints at some major smart money bets as some have discussed yesterday/today.
4) Where we are currently from a moving average perspective is mid 2009 as well as all of 2007, so not that high. The point being we may be extreme from a short term perspective because of the quick rise and very low starting point, but it doesn't look so bad to me on a longer term and leads me to think that the Moving Averages of this ratio could stay here (and likely go higher) for quite some time. This would imply a high vix and continued stock sell off.

I would like to see this index come back down below .5 a few times before I would get comfortable being a bull. Notice that in all of 2008 and most of 2009 this index never went below .5...fear was present the whole time.

Good Luck.