Sunday, May 25, 2008

S&P 500 Warning



OK, so you now know why I'm bearish on the Dow (double top at 200 day moving average) and if you read my last post on the NASDAQ you know I'm bearish there as well, but now it's time to look at the S&P.

Above is a 1 year chart of the S&P500 and in the lower pane is the put/call ratio which I smoothed with a 3 day moving average.

As you can see over the past year, when the put/call ratio gets to a low level the S&P sells off. Since July 2007 we had 4 occurrences where the P/C ratio moved below the red line and each time that happened the S&P had a significant sell off.

Right now the P/C ratio is once again at a low level which leads me to believe the S&P along with the rest of the stock market will have a sell off in the weeks to come...We'll see what happens folks.

7 comments:

Anonymous said...

Nice posts! Thanks!

frank said...

Kevin are you shorting the market?

If so- stop please/

Thanks

Kevin said...

The stop should be right above the high from May.

Brendan said...

Good call. Share same bearish view on Dow. I'm also bearish on crude oil.

thelonelytrader said...

"As you can see over the past year, when the put/call ratio gets to a low level the S&P sells off."

I've always assumed that when the market sells off, it is in fact the P/C ratio that bounces as a result...that the P/C is in large part made up of individuals who, through puts or calls, are responding to the market or in effect creating it, and not leading it.

Is it true that straight plays are responding to options plays, that options plays are responding to straight plays, and that there is also a hedge factor in the P/C ratio?

Is any of this correct?

Kevin said...

Hi lonely trader,

I'm not sure exactly what you are asking. I simply use the put/call ratio as a market sentiment indicator.

The Lonely Trader said...

I'm not sure what I'm asking, either. (I know this kind of statement must be annoying to some people, but I'm hoping you'll humor me.) I am leaning toward the idea that the devil is in the details with this indicator. Sure, there might be more puts than calls, or more calls than puts, at any given point in the series. But I can think of more than a few examples where more puts were not necessarily bullish, and where more calls were not necessarily bearish. I am guessing here, but in looking at the commercials, it would matter a great deal *who* was making the play, and in response to what *context*, specifically. Aggregated sentiment indicators like this seem to scrub away a lot of important information. At least that's what my gut tells me. I am only trying to understand this indicator.

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