I have written about the CBOE Equity Put/Call ratio several times in the past, but I had to bring it up again after what happened last week.
To explain it briefly, the CBOE Equity Put/Call ratio looks at the total number of puts traded each day and compares it to the total number of calls each day. This particular put/call ratio only looks at individual equities and doesn't include any index options.
Because it is a put/call ratio with the puts coming first, the higher the ratio is the more-bearish the sentiment. As you can imagine, this ratio can vacillate wildly from day to day depending upon whether the market is up or down.
This is the reason I prefer to look at the 21-day moving average.
The 21-day moving average gives you approximately one month’s worth of trading days. This past week the 21-day moving average on the CBOE Equity Put/Call ratio jumped up to a reading of 80.61. This is an important threshold as the indicator has only moved above the 0.80 level five times in the last five years.
The indicator has moved above and remained above the 0.80 level, but the initial thrust above the level has only occurred five times. In four of the five instances, the market rallied significantly in the following months.
The only time the market failed to rally was in the fall of 2008 and that is when the market was in total meltdown mode.
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