In our earlier post today we noted the potential oversold conditions in the equity markets. When reviewing other technical data this morning, I was surprised to see the large jump in the CBOE equity put/call ratio on Friday which put the ratio above 1.0. We have noted in prior posts over the years that this sentiment ratio is most predictive of future market direction when the ratio is at extreme levels. In short,
The equity P/C ratio tends to measure the sentiment of the individual investor by dividing put volume by call volume. At the extremes, this particular measure is a contrarian one; hence, P/C ratios above 1.0 signal overly bearish sentiment from the individual investor. This indicator's average over the last 5-years is approximately .625 indicating the individual investor has been generally mostly bullish and more active on the call volume side.
|From The Blog of HORAN Capital Advisors|