Lately I’ve seen a multifariousness of observations almost stock marketplace sentiment, ranging from bullish to bearish to neutral. My favorite stair out of take in is the put/call ratio for all private stocks amongst listed options. This excludes index choice volume. Above nosotros encounter a five-day moving average of the equity put/call ratio (red) plotted against the SPX. (Raw information from e-Signal).
In general, we’ve tended to encounter elevations of the ratio at relative marketplace lows. Over the concluding few weeks, the ratio has dramatically declined every bit we’ve percolated to novel highs. We are currently inward a zone where traders are bullish inward their options-related behavior.
Since the offset of 2014, take in has been an of import say for frontwards marketplace returns. If nosotros only involve a median dissever of the daily data, nosotros discovery that when traders accept been relative bullish (N = 160), the adjacent 10 days inward SPX accept averaged a loss of -.28%. When traders accept been relatively bearish (N = 160), the adjacent 10 days inward SPX accept averaged a arrive at of 1.18%. In other words, if you lot followed the take in herd as well as bought the marketplace when traders were bullish as well as sold when they were bearish, you lot lost meaning money. Essentially all the market’s returns accept come upward from fourth dimension periods when traders did non believe nosotros were going to teach skillful returns.
There’s an of import lesson there.
Further Reading: The Index Put/Call Ratio