On Monday we looked at the retail trader’s penchant for call buying, as measured by the ISE sentiment index. Since then things have continued to become slightly more lopsided as the retail option traders have not relented in preferring calls to puts. The 10 day moving average of the equity only call put ratio has climbed from 231.6 to 233.1.
But today I wanted to look at the more traditional CBOE put call ratio because it is confirming this bullish tendency. For the past 7 trading days (since the beginning of the month) every single day except one has provided us with more than twice as many traders buying calls as puts. The exception was barely made last Friday when 1.9 calls were bought for every single put option.
The 4 consecutive days of call buying exceeding puts by a factor of 2:1 is very noteworthy because it doesn’t happen all that often. I track the 10 day moving average of the CBOE put call ratio because it represents about 2 week’s worth of trading activity:
Note that in the chart above, I’ve inverted the scale for the CBOE equity only put call ratio (blue line) and compared it to the S&P 100 index (OEX). I’ve shown the two going back for more than 7 years but even with this limited number of years, it is clear that such a situation is rather rare, happening approximately once every year.
I’ve roughly indicated the spikes above the current level with red arrows. With the exception of the instance in October 2009, they were better times to sell rather than times to buy – at least in the short to medium term.
Some Historical Studies
According to Rennie at MarketTells, 3 consecutive days of 2:1 call buying has only happened 7 times since 2001. In five of those instances, stocks (S&P 500) were down the next month.
Jason at SentimenTrader looks at it a bit differently. He notes that the past 5 days consecutively placed the ratio above its 6 month moving average by 15% (or more). This has only occurred 8 times historically when the stock market has been near or at a high. Results going forward are mixed to down.
Seasonality vs. Sentiment
It is true and widely reported that we are right in the middle of positive seasonality. However, more and more extremes of sentiment are creeping into the picture and providing cross currents. We’ll take a closer look at the usual list of sentiment indicators in tomorrow’s weekly sentiment overview.
It is entirely possible that the stock market will push forward with seasonality winning against extreme bullish sentiment. But at this point the music could stop any minute and all those points and more could be lost much more quickly than they were gained.
So if you insist on dancing, I suggest you waltz closer to the door, just in case.