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TW Patron++
Posts: 1,054
Reply with quote  #1 
With strengthening market breadth surfacing, along with fundamentals such as stimulus packages etc, it may be a good time to look at some sentiment indicators perhaps not everyone is looking at.

First, the weekly OCC smallest retail trader (1 to 10 contracts per transaction) equity options Buy-To-Open (BTO) Call-Put (CP) ratio with Bollinger Bands.

This indicator typically touches its upper band before trouble for the bulls begins in the intermediate term.  The small equity options traders have not turned wildly bullish over the past several weeks suggesting they are expecting further weakness going forward.  The small traders are not wrong 100% of the time, but over the past 9+ years, they are not typically the group of traders to follow... last week their BTO put purchases relative to their BTO call purchases increased to its highest level since early December, 2008.

Next is the weekly small trader BTO call Sell-To-Open (STO) call ratio.  Last week, the smallest equity options trader STO call volume exceeded their BTO call volume indicating they expect to pocket the premiums of the call contracts they wrote over the coming weeks.

The weekly small trader BTO Put-Call (PC) premium ratio, after reaching extreme levels several weeks ago, has yet to fall to complacency levels, which is usually good news for the intermediate term bullish case.

The weekly total retail customer BTO PC ratio (all retail customer contract transaction sizes) is exhibiting a higher level of belief in the bullish case than the smallest equity options players... not a good sign although there is room for the larger equity options traders to become more bullish before warning flags are waving hard and fast.

The next chart uses the same method as the ISE options exchange ISEE index, which most readers are likely familiar with.  This version is weekly, not daily, and includes the BTO Call-Put ratios of all retail index and equity options traders on all options exchanges, not just the ISE, which accounts for a bit over 30% of all options volume.

Trader complacency for the call-put volume ratios is illustrated by the peaks of the blue curve, while fear is designated by the blue curve troughs. The current pattern would typically be interpreted as neutral for bear market conditions.

Turning to some daily options indicators, let's look at the OEX options action, comparing market maker PC ratios minus retail/brokerage firms PC ratios.  Interestingly, but not surprising, the market makers dominate OEX options volume, often accounting for up to two-thirds of the volume.  Brokerage firms barely participate in the OEX contracts, thus the retail traders are the market maker's competition in this market place.

Currently, the difference between the market maker OEX PC ratio and the retail trader PC ratio (blue curve) is much closer to the buy zone than the sell zone, suggesting a sustained sell off over the next couple of weeks is unlikely.

The daily equity options market maker PC ratio (all option exchange volume) is also indicating more upside could be supported.  The market maker PC ratio is rapidly dropping, but has yet to bottom and turn upward which gives the sell signal for this particular tool.

Another daily options indicator that is useful to watch, is the market makers' volume as a percentage of total volume for the highest volume, broader based index ETF contracts. The market maker volume percentage for the below chart includes SPY, IWM, DIA, and QQQQ options volume.  The financial ETF (XLF) options volume is increasing rapidly, but is not included in this indicator.

When the market maker action in the ETF options becomes more dominant, a change in market price direction is usually on the radar screen. Over the past year or so, high market maker volume percentages have coincided with bottoms once the curve rolls over.

Over the past few weeks, the market maker percentage of total ETF options volume has rapidly declined, which often leads to price tops. It hasn't shown up in this chart's moving averages yet, but the market maker volume in this basket of ETF options has started to move up significantly over the past two trading days, suggesting a big move is now on the radar.

Shifting gears away from options indicators, let's look at a Liquidity Premium (LP) indicator comparing the DIA (Dow ETF) volume versus the actual Dow component volume. The LP concept was originally conceived by Jason Goepfert (, although other LP variants of comparing ETF volume with its underlying index component volume have been derived.

The idea behind the LP tool, is when traders flee to ETFs in lieu of the individual stocks of the underlying index, it suggests a flight to safety, whether short or long, of the ETF's diversified nature rather than trading the index's components.  Conversely, heavy volume in the index components relative to the ETF volume, suggests traders are confident they can trade individual stocks with the idea of achieving higher gains than the ETF.

The introduction of many inverse and leveraged ETFs have rendered several of the original LP series less useful than the indicators were a couple of years ago, but thus far, the DIA-Dow LP indicator has done a decent job of predicting price turns.... right now, the DIA-Dow LP variant is not looking good for the bullish case.

Taking a look at the daily short selling volume as a percentage of total sell volume, we see this indicator has reached multi-year highs recently. When this indicator begins rising, it provides a heads up any current price rally may be getting long in the tooth. Once the rising indicator rolls over (short selling subsiding) we get a buy signal.

There is a disturbing message to the bullish case with this indicator's recent ascent to record highs. This rise in short selling activity is mostly due to large and well funded traders, thus the trend of this indicator should be closely monitored over the coming weeks.

Note the impact of the uptick rule for short selling being turned off and turned on over the past 18 months.  Along with easy money and mortgage loans to unqualified borrowers over the past several years, some analysts point to the abolishment of the short sale uptick rule as the "last straw" that toppled the financial system, allowing unbridled bear raids on targeted companies. 

Looking at the timing of the short sale uptick rule abolishment (July 2007) versus price, it would be tough to argue with the theory.

Although I prefer the money-on-the-table psychological tools over surveys, the Market Vane (MV) bullish percentage survey does provide useful divergences versus price.  Below is the NDX MV survey, note how the number of bulls diverged with price at the November 2008 price low.  And also note, the NDX bull percentage was not keeping up with price last week, thus there are warning flags being raised for the short term... although the surveys do lag price action by a day or two, so, this divergence could be wiped out quickly.

An aside for NDX, its climax indicator, CLX, which is one of the da_cheif's favorite tools, reached +69 Friday, the upper end of its usual range.  There is more room for the CLX variant to move higher before short term trouble unfolds, but that is a flag to respect for the short term.

Intermediate term-wise, many indicators are supportive of more price upside, but with the unprecedented events going on in the US government currently, there is a thumb on the scale...



TW Member
Posts: 2
Reply with quote  #2 
Great stuff Mortiz, thanks for the update. 

TW Patron
Posts: 46
Reply with quote  #3 
Randy, awesome and greatly appreciated.


TW Patron++
Posts: 1,054
Reply with quote  #4 

Thank you for the kind words....

A quick update for many of the options indicators from the week before last:

- the small equity options traders' BTO call-put ratio is now on its upper Bollinger band, a caution signal in the best case for the bulls, a sell signal at worst case

- small equity options traders' BTO put-call ratio nose-dived last week to 0.58, matching its 10-3-2008 levels

- most liquidity premium indicators remain in sell zone although there are a couple now neutral

- at least half of the many options indicators monitored remain in neutral zone, but several flipped bearish after last week's action

- most breadth and volume McSums for several broad based indices are having difficulties in breaking cleanly above zero

When considering the deterioration of several psychological indicators in conjunction with price and internals warning flags posted on TW this weekend, one could conclude "be careful" with long positions.


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