Friday, December 26, 2014

Sell Warning From Put/Call Ratio

On Wednesday the total put/call ratio gave what I would consider a sell warning for stocks.  Going back to the 2007 bull market high, there have been 22 unique instances of these signals. 

The average maximum decline over the next 2 months has been 8.15%.  

Out of the 22 instances 16 have showed greater maximum 2 month future declines than gains.  So the "win %" so to speak, is 72%.

On the successful instances with clearly skewed future results towards the downside, the top in price for the next 2 months has typically occurred from within a couple days to 2 weeks.

Going back to Christmas 2009, the average max decline over the next 2 months on all unique instances is 7.77%.

There have been 4 other instances around the Christmas holiday where signals occurred going back to the 2007 market highs.  They lead to max 2 months declines of -5.52%, -3.87%, -7.22%, and -14.42%.  The biggest decline here occurred in the last bear market.  The other 3 were during the current bull market.

So what's the conclusion?

It seems like the odds favor a pullback over the couple months.  Given the current sizable unfilled gap up on SPY on 12/18/14, that seems like a sensible price target for a typical pullback.  That is at the 202ish level on SPY and would represent only about a 3.5% decline from current levels, so it seems well within reach given that the average max decline even in the bull market so far is about 5.5% for similar signals.

From reviewing past instances, most of the subsequent pullbacks from these signals, made bottoms in the 1st week of a month 1-3 months down the road.  So for put option speculation it seems like a Feb or March expiration at the money put, would be sensible and given solid odds on a 100% or greater return with apparent odds of success at around 70% based upon past instances.

From the close of the day on which the first of a cluster of similar signals occurred in the past, successful near term tops, have often occurred within 1-2% above the first signal day.

Given the current signal and the potential time frame for a pullback, I am putting in a limit order to buy SPY Feb 20th expiration puts, the 209 strike at 4.00.  Then the exit order will be a limit order of 8.00 to sell prior to expiration.  That would necessitate probably only a little less than 4% decline in the next 7 weeks to achieve the 100% return.



  1. In addition: A strong (9 observations within 2 weeks) Hindenburg Omen is still in play and a significant Bradley turn date of Dec 26

  2. interesting. My feeling is that the energy sectors are so oversold, that it is probably more likely that we see the market strengthen once that sector bottoms and puts in a big rally. Also, while I don't have expertise in the Hindenburg omens, my understanding is that once the McClellan oscillator moves back to positive, the signal is invalidated. And right now the oscillator has rebounded back up from the mid December low.