Put/Call Ratios Suggest Correction Ahead for Stocks 1-9-18

Currently many measures of market sentiment are in excessive optimism territory. 

One of the data sets I follow closely and which is a real money measure of sentiment is the equity put/call ratio from CBOE.

Currently there is a relatively low reading on the 21 day average, the lowest going back to mid 2014.
However I looked at this from a larger scale relative basis and what I did was to take the 21 day average a divide it by the 84 day average.  So we are taking the last 1 month readings relative to the last 4 months total.

Currently the ratio stands at 0.92 which is a relatively low reading for the data set.

I then searched for past times when these low readings occurred at a 52 week high and with a close of SPY above its upper bollinger band.

I removed clustering of a few readings where a few days occurred in a short period (like is occurring now).

And the results were a notable bearish skew to forward returns for the next couple months, but being most notable at 1 week to 1 month ahead.

This was pretty consistent as well in that 9 out of 10 instances had equal or greater MAX losses over the next week relative to gains and the MAX losses on average were over 3.5 greater than the MAX gains.

In 7 out of 10 instances there was a 1 week forward looking MAX loss greater than 1%.

Looking out 1 month, when removing clustering and leaving only the very first reading of a cluster, there was ~2.5 greater MAX loss than MAX gain over the coming month.  6 out of 9 instances had MAX losses of 2% or more in the next month.  6 out of 9 instances also closed negative at the 1 month forward mark.


Given my overall assessment of the market here, I would estimate that the above numbers give a fair risk assessment for the upcoming weeks.  I would not be surprised to see a 3% or more decline over the next 3-4 weeks, from this week's opening values.


Pete