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mortiz

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I have noticed posts on some message boards of how bearish the equity options ratios have been over the past few weeks.  Granted, many of these commentaries are posted by very short term traders (scalpers).  But for longer term investors who ride the trend and don't get too wrapped around the axle about corrections of a few percentage points for their "serious" money, perhaps a longer term look at options ratios over the last decade or so can "put" these indicators in perspective.

First a look at the CBOE only equity put call ratio action over the past ten plus years.  These are longer term moving averages (20 day and 60 day), but compare where these equity put-call ratio indicators stand relative to the last few years of the bull market through the nineties.  I know, the hedge fund arguments which have elevated the put volume over the past few years, but I don't see prices plunging 10%, 15%, or more over the past few years either.


The CBOE total (index and equity options) put call ratio has a similar pattern over the past 13 years.  Notice the declining trend of the put-call ratios during the 90s relative to rising trend of this indicator since the 2003 bottom.



A look at the weekly action of the retail (all transaction sizes) buy-to-open (BTO) equity options call-put ratio which is closing in on its upper Bollinger band.  Normally, the call-put ratio touches its upper band weeks before a significant market top and is typically approaching or below its 20 week MA when the actual price correction gets underway.  Recall this is a call-put ratio and note its trend since 2004... down meaning put activity has been gaining interest relative to calls despite the higher trending price action.



The equity options market makers' closing of BTO put and call positions continue to reflect the positioning of the index futures commercials' positioning, i.e. they are not looking for a significant decline in prices quite yet (see Johnny Micou's COT charts).  This indicator is a call-put ratio of the market makers' closing of BTO call and put positions. 

Normally, the market makers begin closing their BTO call positions at a faster clip than their put positions leading up to an important top, which is reflected in this indicator significantly breaching the 1.50 level, then rolling over toward the 1.50 zone, then moving back up nominally preceding the actual price top.  The 1.50 level has yet to be breached at all since the spring 2007 price lows.

 

One fly in the ointment for the bullish case in the options data in the smallest retail equity options trader put-call ratio which hit its lowest level in 18 months last week with a posting of 0.38.  Normally this indicator begins rising prior to a market top, which has not yet accomplished.  It is likely the optimism by this smallest group of retail equity options players will matter sooner or later resulting in price shakeout to instill some fear into these traders.  Compare these recent low levels with those this group accomplished at the 2000 price top.... still a ways to go.



Not options related, but for the longer term, bulls still have the next indicator on their side, the NYSE short interest ratio, which is at its highest level in the 75+ years of data I have at my disposal.... a lot buying power here.  Fresh data should be made public in the next week or so, and if the daily SDOT short data is indicative of the shorts still outstanding, the short interest ratio will likely not be dropping too far.



For the shorter term, there are some money on the table sentiment indicators bothersome for the bulls, and then there is the inability of cumulative breadth lines for most indices not confirming new highs yet, weekly or daily breadth.

Up-down volume plurality is a different story, for many different variants of volume measures, the money flows into advancing issues has been significantly stronger than the money out flows of declining stocks.

Tom McClellan's timing models have a significant cluster of bottoming signals toward the end of July, and based upon my observations of these McClellan timing signals over the past several years, there will likely be some level of a swift price decline coming soon, or perhaps, the scenario that would frustrate bulls and bears alike:  a couple weeks of price chop and the late month cluster of bottoming signals would be a time frame where prices move upward from at an accelerating rate.

For the longer term, there is still plenty of upside price potential, assuming political agendas do not come to fruition... like jacking up tax rates in several areas as I have been hearing from some of the candidates stumping for president.  Hiking the capital gains tax to 20% or 25% would certainly impact the equity markets... but that potential is at least 17-18 months away, so plenty of time for this market to climb significantly higher in the mean while.

FWIW

Randy

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