Thursday, June 19, 2014

Equity Put/Call Ratio At Multi Year Lows

Click on Chart to Enlarge

The equity put/call ratio put in a very low reading yesterday at 0.38.  And the chart above shows the 10 day average at a multi year low and outside its standard deviation band.  These are further signs building a case that stocks are nearing an optimistic extreme.

The other side of the equation is that stocks are at all time highs and so optimism is warranted here.  As I always point out, it is not the extreme that typically coincides with a high or low.  There is often a period of slowing of market action and development of lesser sentiment extremes which diverge with continued price highs that are the better indication that the time window is narrowing in on a trend change.

From extensive experience monitoring these ratios, my opinion is that extremes like this are good places to reduce positions.  In these cases, sell out partially of the market.  It is true that sometimes trends only pause and your stocks will continue to move big.  So that is why I always hammer home the idea that a trailing stop or stop adjusting mechanism be used to allow for major winners to continue.  So the idea is that when the market is at a sentiment extreme, often most of the move is done, and whatever gains come from here, will often be given back and then some at the next correction.  And so even if you partially sell out, you could often buy back the position at a lower price when opposite extreme sentiment conditions show up.

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