One Chart That Scares Me

August 1, 2014 8:07 AM

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One Chart That Scares Me

Back on June 26, I noted the One Chart That Scares Me - the CBOE options equity put/call ratio.  Then I gave another update two weeks ago and noted it looked scarier actually.  Well, here’s another update and things are the same, I still think this says weakness is coming.

Below was the chart I used back in late June.  As I said at the time, as long as it is trending lower, this is bullish.  The big concern was how low things had gotten.  In other words, how potentially complacent options traders had become.  A move higher from these low levels could produce some troubles for the bulls - as this ratio tends to trend inversely with the equity prices.  

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Rewind back to two weeks ago and the ratio had finally turned higher.  What was a concern was now a full-fledged worry.  Also the Russell 2000 (RUT) made a potential double top.  Both of those were clues some near-term weakness was likely to happen.  Here’s the chart from two weeks ago.  

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What’s it look like now?  The RUT has totally broken down, the SPX finally cracked some yesterday and the put/call ratio is firmly pointing higher with no signs of a change in trend anytime soon.  As long as this ratio is going higher, I’d be more defensive.  

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This isn’t the end of the world and I still think we should have a nice second half of the year when all is said and done,  but between sentiment getting a little too frothy, seasonality a big worry, and the chart above - I think it pays to be very open to further weakness the next few months.  

Thanks for reading.  

Photo by Elisa Perusin

 

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