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There is quite a bit of evidence in the market sentiment arena an IT top may be in, or getting close, going into the 9 month cycle low due in late January-early February 2006.  The stock index commercials' COT data has been well documented on TW suggesting an IT top as well.


The ISE exchange's ISEE sentiment indicator measuring retail customer buy-to-open (BTO) equity options call-put volume activity is reaching levels normally associated with IT price highs.



The SPY-SPX liquidity premium (LP) tool is suggesting too much complacency among traders as well.  The LP concept was conceived by Jason Goepfert ( and measures the detrended volume of ETFs versus the index's underlying component volume.  When the indicator reaches it lower range, price tops are typically being formed; when the LP is in its upper range and rolls over, price bottoms are usually in.


The Q4-NDX and IWM-RUT LP variants are essentially in the same configuration as the below SPY-SPX LP, i.e. bearish territory.



The Q4-QQV options volume-volatility "power" indicator is also suggesting complacency among options traders.  The OEX-VXO and SPX-VIX options power indicators are in sync with the Q4-QQV example, thus all three are exhibiting too much bullishness.


One weakness of the options power indicator is its comparison of a range bound volatility index with the associated index options volume, thus seasonality does impact its signals.  However, this indicator was in its lower complacency range going into the low-volume tendency of the Christmas holiday season.



The weekly Options Clearing Corp (OCC) small trader (1 to 10 contracts per transaction) equity options buy-to-open (BTO) call-put ratio is mimicking the ISEE index by reaching its upper range where continued price appreciation is usually difficult. The small equity options traders' enthusiasm is not yet at levels associated with major tops, but is at levels where a price pullback/consolidation is a reasonable expectation.



The OCC small equity options traders' BTO dollar weighted (premium) volume call-put ratio is also exhibiting little fear among the smallest options traders. The OCC does not provide a breakdown of BTO volume with respect to in-the-money, at-the-money or out-of-the-money volume, so this indicator may be illustrating an abnormal amount of volume with in-the-money strikes... if it isn't, this indicator is suggesting trouble ahead for the bulls.



The weekly OCC total retail customer (all transaction sizes) equity options BTO call-put ratio is also at levels where IT tops usually unfold. The bullish expectations of retail options traders on all exchanges backed off considerably last week, but when this call-put indicator blows through its upper band, price tops or consolidations typically follow.



The next weekly OCC equity options indicator is the action of the market makers in all six exchanges. The OCC only reports the market maker's closing of positions, but this indicator does a decent job of identifying price top and bottom zones.  The Market Maker behavior of late is suggesting caution on the bull side.



The daily total options (equity and index) call-put ratio for all six options exchanges (not just the CBOE) is also suggesting caution for the bullish case. This all-exchange total ratio recently reached the levels seen in January 2004, where prices had a tough time going higher for some time.



The all-exchange equity options put-call ratio is also at levels typically associated with price pullbacks/consolidations. The OCC includes all ETF put and call volume in their equity volume figures, thus in attempt to refine this data into equities only, the put and call volume of the Q4, SPY, and IWM ETFs have been removed prior to calculating the put-call ratio.


The weekly OCC equity options volume is broken down into three groups of traders: retail customers, market makers, and brokerage firms.  Over the past two weeks, the brokerage firms have conducted some extremely large options BTO call and sell-to-open (STO) operations on the Philly and Pacific exchanges.  Two weeks ago, the large brokerage firm call operations targeted the SPY, but last week, their operations were focused on unknown equity options. 


The SPY brokerage firm volume has been filtered out, but the action from last week is plumbed into the put-call ratios illustrated below. 




The next chart compares the straight equity options volume put-call ratio (black curve) against the put and call volume as a percentage of the put open interest and call open interest ratio (all exchanges) represented by the blue curve.  Although the two variants follow one another closely, note the magnitude differences between the tail end of the bear market and the bull market from early 2003. The all exchange equity options data is only available from the OCC since mid-2002.



Below is the CBOE only total (equity and index) put and call volume as a percentage of the put open interest and call open interest ratio from 1995.  This 30 day MA of the indicator is suggesting from a longer term perspective, this indicator is in the neutral zone.  Thus following any near term price correction/consolidation, this tool is saying the market is not yet at a major top with respect to sentiment in the options market.



Signs that an important bottom is coming down the road, likely at the 9-month cycle low due in the next six weeks, is the action of the call-put open interest ratio for the Q4 options series. This indicator typically rolls over before a buy signal is given, but is approaching the levels seen at the August 2004 and April 2005 price bottoms.  The behavior of the Q4 open interest is telegraphing more price upside is in the cards going forward.



The OEX open interest, like the Q4 open interest series, also does a yoeman's job identifying tops, and price bottoms in particular.  The OEX open interest call-put ratio is also moving into the range typically coinciding with price bottoms.



A longer term look at the OEX open interest call-put ratio illustrating its tendency of coinciding with price lows when reaching its upper range.  Like many sentiment indicators, the range of this tool changes with bull and bear markets.



From a more near term perspective, the Rydex small/mid/large cap funds and their associated inverse funds' percentage of the total cap asset flows, is suggesting an IT top is in or near.



For the longer term, this next Rydex assets indicator is suggesting the market is not at major price high extremes.  This indicator measures the NAV adjusted assets of the four largest pairs of Rydex bull and bear funds (Arktos-OTC, Ursa-Nova, Tempest-Titan, Venture-Velocity).  Although the upper extremes of the indicator has a downward bias, from a longer term perspective, the tool is not yet at extremes one would expect at a major price top.



Sentiment indicators can and do remain in overbought extremes for extended periods of time before prices realize they are supposed consolidate or correct, it is likely some of the sentiment extremes current in effect will begin to matter.  With the weakening of breadth and money flow indicators of late, along with the 9-month cycle low due in the next several weeks, it is likely prices will be consolidating or correcting over the coming weeks to temper the current bullish enthusiasm prior to the next important price bottom.


Tom McClellan, editor of McClellan Financial Publications:


often updates this interesting graph of the 40 week cycle and its 20 week harmonic.  The important point of this graphic, are the 20 week lows coinciding with the trough in the "humps", and the following crest of the hump. 


The McClellans point out when prices are higher on the cycle's second hump relative to the first hump of each cycle, the ensuing 40 week cycle low is usually muted and higher prices typically follow.  The second hump of this current cycle coincided with higher price highs than the first hump's associated price, i.e a right translation, thus the probability is good any correction over the next several weeks will not be excessively severe and higher price highs are likely by the spring of 2006.


Courtesy of McClellan Financial Publications:


Time will tell, but following the coming 40 week cycle low, excessive bullish sentiment should be cooled, and higher price highs are likely in the late winter of 2006.





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