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TW Patron++
Posts: 1,054
Reply with quote  #1 
For the intermediate term bullish case, last week's action was disappointing with respect to generating sufficient fear in the markets for posting a solid price bottom.  Despite a nearly 4% price decline in the SPX and over 8% decline in the NDX, several money-on-the-table sentiment tools exhibit only fear in missing a price bottom.

First example is the OCC equity options Buy To Open (BTO) put-call ratio for the smallest retail players who trade ten or less contracts per transaction. The PC ratio last week for this group was 0.43, just a very small increase form the previous week, and far from levels normally corresponding with important price bottoms.

The equity options BTO PC ratio for retail players trading 11 to 49 contracts per transaction wasn't much better with a PC ratio of 0.55, exhibiting a higher level of opening put positions than the smallest equity options traders, but again, not even close to levels typically coinciding with correction price lows.

The normally most sophisticated retail equity options players, those trading 50 or more contracts per transaction began loading up on BTO puts last week, which is not a good sign fro the bullish case when the smaller traders are still focusing upon opening new long call positions. The largest retail equity options players' PC ratio took a spike to 1.10 last week, but not high enough to start looking for a price bottom. 

This group recognizes a sell-off gaining steam quicker than the smaller traders, but these large traders, on-balance, get far more bearish than they currently are when price bottoms are achieved. 

The equity options market maker motivations are more difficult to interpret since the OCC does not publish their BTO position volume, but their BTO call and put closing volume is published, and a consistent pattern emerges with market maker closing position volume at price lows... and that doesn't yet  appear to be the configuration following last week's action. The market maker 4 week MA call-put ratio is currently at 1.13, with the tendency over the past year being this ratio touching the 1.0 range, then turning up when price lows are in.

The daily all-exchange equity options put-call ratio is beginning to rise, but is not to levels typically accompanying price lows.  This all-exchange equity options data is published by the OCC, and they treat ETF volume as equities, so in following chart, the QQQQ, IWM, and SPY, the ETFs generating the most options volume, are removed from the data series in an attempt to partially "purify" the data down to equity options action only.

At 0.74, the all-exchange equity PC ratio (10 day MA) is not close to levels usually coinciding with price lows over the past couple of years.  Note the rising range of equity options' PC ratios over the past several years.

The Rydex funds' asset numbers have lost a bit of their luster over the past couple of years with respect to being a useful indicator of retail mutual fund trader's outlook for the intermediate term.  One Rydex related tool that has been effective is the percentage of money market assets of the total Rydex assets invested in equity funds.

When fear surfaces in the Rydex universe, money flows heavily into the money market fund, driving the blue curve in the below chart to levels much higher than it currently is... very little concern in the Rydex universe at this time.

The NASDAQ-NYSE daily volume ratio continues to be at levels more indicative of price tops than price bottoms.

There are still potential bullish divergences in several breadth MCOs in different indices, but the volume related MCOs in the majority of indices have taken out their mid-October lows, with several beginning to challenge their MCO volume lows from August.

A week or so ago, the Dow and NDX CLX related MCOs were discussed in another thread, and those tools were warning of trouble ahead.  The Dow AYDIS MCO (derived from the difference of daily CLX and CLXpp daily raw data) is starting to congest at oversold levels, which should be good for a upward price pop in the short term, but typically, the Dow AYDIS MCO gives a nice positive divergence from price at intermediate term lows, and such a divergence has not yet unfolded.

Likely not a surprise to anyone, the NDX component CLX and CLXpp MCOs, are in waterfall decline mode (not shown), but the NDX AYDIS MCO tried to congest but fell south from that congestion zone Friday, implying lower lows for the NDX following any near term reflex rally.

There are glimmers of hope for the bulls forming, one of them being an indicator that measures different daily volatility index values (QQV, VXO, VIX, etc) with their respective moving averages, then the same operation is calculated with the volatility index's associated index options volume, and the two values are multiplied.  This yields what I dub the "volatility-options volume power indicator". 

Most combinations (OEX-VXO, SPX-VIX, QQQQ-QQV) of this tool are reaching levels where bottoms can begin form, but the indicator must roll over first, and often is followed by a lower high following the initial upward thrust of the indicator.

An example is the current configuration of the QQQQ-QQV power indicator.  With OPEX on the table next week, I would expect this indicator to rise to even higher levels, but I am guessing the ultimate price bottom of this correction will be accompanied by a double pump of the power indicator, with the second "pump" lower in magnitude than the initial thrust.

With OPEX on next week's schedule, anything can happen, but one could likely expect a pop in the index up to around 1490 (max), then likely back down to retest whatever the low is prior to the bonce, with a new lower low having a high probability.  If any coming reflex rally is accompanied by heavy shorting and put buying, then my forecast BS would have to be reconsidered.

IMHO, the bullish case is not strong at this juncture due to simply a lack of fear in area where fear is usually exhibited at solid price lows.... this time could be different of course, but it would be the exception.



TW Member
Posts: 293
Reply with quote  #2 
Very nice job Randy. Thats the type of post I can understand,
thanks for sharing. That type of data I do not normally fool with, therefore I find it very interesting.
Best to you, Scott

TW Patron
Posts: 24
Reply with quote  #3 
    Thanks so much for your timely study; great stuff.
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