A Simple Indicator Based On The ISE Options Market

I’ve been toying with the ISEE sentiment indicator and trying different ways to coax some insight out of it for the options market and the equity market in general.

One interesting path of research is to start by taking the simple 10 day moving average of the ISEE equity only call put ratio – the same that we look at regularly in the weekly sentiment overviews – and then to look at the 20 day rate of change for this ratio.

That produces the chart below:

If we then focus on the spikes up, we notice something interesting. Since 2006 there have only been 8 instances when the 20 day rate of change spiked up to or near its top limit. I’m ignoring the instances where it repeats within a short time span of course. These were (in chronological order):

  • mid April 2007
  • mid September 2007
  • mid February 2008
  • end of December 2008
  • mid January 2010
  • mid March 2010
  • mid December 2010

In the majority of the cases, the S&P 500 index managed to continue climbing for a little while longer. But within a short time period a major top was reached and a significant correction ensued. This might suggest that we are close to finding a good indicator if we can perhaps tweak the RoC time period a bit more.

For now though, the relevant issue is that we have passed a ‘peak’ in this rate of change indicator. We’ve already gone over the extraordinary bullish view that the ISE options market is presenting right now. This recent signal, in keeping with the pattern, would suggest that while the market can inch forward slowly for a little bit longer, a major and swift decline is around the corner.

Later this week I’ll explore the ISE numbers in a different light to see if we can understand a bit better the significance of the extremely bullish call binge we just witnessed.

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One Response to A Simple Indicator Based On The ISE Options Market

  1. NikeBoy says:

    nice post

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