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.

Put Call Ratio - Fear creeping back into market?

The put call ratio has been one of my favorite indicators. It started to fail toward the end of the bear this year and not giving as reliable signals, but it looks like it may be coming back into play.

As you can see in the chart, the put/call ratio had bottomed out below its long term lower support of around .85 puts for every 1 call bought on the options market. The indicator is now in an uptrend and is quickly climbing back into its 2008 average range of around 1 to 1 puts to calls. This could be telling us that the market is becoming more fearful. On the chart I have also drawn vertical lines at market tops and bottoms. Historically this ratio has helped call these tops and bottoms as you can also see on the chart. Also, you can see that the indicator shows where ultimate fear occurred, which was in the October decline. It is rare for the market to be so complacent as it was the last 3 months, which could be a sign that the rally wasn't going to have the kind of fear it needed to continue indefinitely.

If this market is about to fall again, I expect this ratio's moving averages to approach the 1.25 puts to calls resistance as it did at previous bottoms.

Market Update Email 3-6-09

To: Friends and Family
Subject: Current Chart

All, it's been awhile since I sent out an updated chart, so here it is. As I mentioned I took some profits today and am frankly unsure of whats going to happen next. I still am waiting for that bounce and we have a possible wave count completion (see chart), but my indicators say we could have a lot more downside before that bounce.

Im just not sure. I will do some more research this weekend. For some reason I am not trusting my indicators. What I am sure of is we will get a multiday bounce when this down leg is over followed by another big selloff which should complete our market bottom at new lows.

The 2nd chart is one of the VIX (the implied volatility on options contracts). This is one of my indicators and it should be peaking as the market falls. The chart I built has the VIX inverted so that it tracks the market (which means it should be spiking down as the market falls). As you can see there is some crazy divergence going on now that hasn't happened this entire bear market. Why is the VIX not tanking? That is what I need to study more.

Good luck. Nothing wrong with staying out of the market when you are unsure of things.

Market Update Email 3-5-09

To: Friends and Family
Subject: Quick Market Update - Taking some profits

Just wanted to let you all know that I am taking some profits on my shorts. I still think we will see lower lows, but I am also expecting that decent bounce I have been talking about, therefore I am going to a more cash stance for now until I am able to do some more research. Currently that bounce can run as high as $775 when it does occur, but I doubt it will have that much steam. Theres a few things I must figure our first including the VIX, put/call, and relative strength of the nasdaq 100.

Im still bearish, but being the aggressive trader that I am, taking some money off the table seems like the smart money management thing to do. So, wait and see mode it is for me. I am still holding some shorts, but have closed all of my put options on the market. The one regret I may have is if this market crashes, which the VIX and Put/Call are certainly supporting right now, but I would rather miss out on that than risk my profits of the last 2 months. Besides, I am banking on that next opportunity in a week or two.

Just trying to do some money mangement for now. Send me individual questions if you have any.
Good luck.

$VIX Blog entry on Stocktock

This blog links to a blog I posted on stocktock.com...

The VIX has yet to confirm this move even though we are down 20% from the nearest high...im still trying to figure it out. either this is a gift from the put buying gods or something is up. Maybe some comments will help figure it out.

Bear market until proven otherwise!

Market Update Email 2-20-09

To: Friends and Family
Subject: Put/Call ratio today once again set a very bearish mark

Down to one of the lowest levels of the bear market at .69. I imagine this will change as the market falls the rest of the day today, but should still be a bearish number.