Excessively Optimistic Options Data

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Across the board options data is showing extremely high bullish sentiment. The charts above show it from a few angles. The options speculation index shows total bullish bets versus bearish bets. The bullish bets are swamping the bearish bets more than any other point since near the "tech bubble" highs.

The detrended equity put call ratio shows that the shorter term average of put call ratios is much more bullish than the longer term. This data tends to revert to a mean of zero, and if extremes reach 20% from that, it is often a turning point in the markets. The 5 day average of the equity put/call ratio is lower than any time since April of this year, and it is not too far off from that.

The ISE equity call/put ratio rocketed up Friday. This puts it at an extreme level right at the range where it peaked in April of this year. Also the 10 day average is higher than it has been in quite a while. All these suggest that the bullish sentiment is at an extreme and is likely to back off over the intermediate term.

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I noted in early November that I thought the US Dollar index would probably have a false trendline breakdown, and then start to rally. That is precisely what happened. Now is has backed off a bit as the market has rallied the last couple weeks. But the strength of the move down in the USD is weak compared to what it typically has been when stocks are uptrending. I think this is another clue that stocks are topping here and the USD is in a continuing uptrend.

Related to this, there are several commodities that I think are in very good position to short. Cotton being one (BAL is an etf to take advantage of moves in cotton). The grains also look nice to short, with etf's like DBA offering an equity opportunity to take advantage of that. Gold has put in a bearish candlestick pattern at a short-term double top with divergent technicals. Also oil looks like it may have topped as well or is in the process.

In any case, my suggestion is that commodities will back off significantly in the months ahead, and the USD will likely continue up for a while. I would also expect stocks to fall in the months ahead.

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This chart shows the beautiful bearish divergence in the SPY etf daily chart. A top should form soon if the divergence is to remain. Also, not shown is that there is a bearish divergence on the weekly RSI and MACD of the major indexes as well.

One thing that may argue for some further upside in stocks is that the QQQQ is only a couple percent shy of its Oct 2007 bull market high. It may be ideal to see it double top above that level before putting in any meaningful decline. Related to this, the Rydex data is currently showing a preference for Nasdaq 100 funds that is 34 to 1 bull to bear ratio. That is near levels at the tech bubble high. So we have in the last couple months seen an historic build up of short Nasdaq 100 futures positions by the "smart money" and a huge build up of longs in the "dumb money" Rydex funds. Longer term this is ostensibly negative for stocks.

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Bonds are oversold on an intermediate term technical basis. There is a nice bullish divergence on the daily chart of TLT. The inverse correlation is still holding between stocks and bonds. If bonds turn up, then stocks probably will move down. I want to reiterate that I think it most likely that we have seen longer term highs in long term bonds though. So I am not suggesting that this is a great investment buying opportunity, though it may be a nice trading opportunity.