Thursday, February 25, 2010

Using the Intraday Equity Put/Call Ratio to Gauge Sentiment


The stock market opened sharply lower this morning and broke below important support in early trade. Although this looked quite bearish, the mixed sector performance and firmness among other asset classes suggested that we might be in more of a range environment. A number of traders apparently did not make this shift; by the end of the day, I heard from more than a few frustrated bears.

The intraday CBOE equity put/call ratio (above) helps us understand what was going on. Average put/call levels since the start of 2010 have been around .63. Notice how bearish sentiment grew through the morning, even as stocks were basing. Once the market broke out of its morning range on solid buying interest (NYSE TICK) and volume, put/call levels never dipped below average and indeed stayed elevated during the afternoon. This bearishness helped buoy the market through the afternoon trade.

Once we broke obvious support, it was obviously time to be short. Unfortunately, markets rarely reward what is readily apparent. A look below the surface at the put/call sentiment showed that the short side was crowded--and that set up a significant reversal.
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5 comments:

RDV said...

If I'm understanding this rightly, there was an average from circa 0,8 more puts bought than calls. Bearish also, as you say.

As the Nyse-Tick (thank the heavens such an indicator exists) told me today, sentiment was quite bullish. I was positioned - rightly so - at the long side. I did not look at this put/call-ratio.

Seeing this afterwards I'm happy I didn't do so because that might have influenced me wrongly.

Also I suspect that this shown bearishness might have been caused by traders who have been hedging their long-positions.

So, dear dr. Brett, what is this p/c-ratio worth?

Brett Steenbarger, Ph.D. said...

Hi RDV,

The put/call ratio is a contrary indicator. That is its worth.

Brett

jsdtrading said...

Watching at the 15min Marketdelta chart, this market was driven higher, and the big guys selling at the top with negative delta. http://www.charthub.com/images/2010/02/25/30minDUALNEW.png

Matthew C. said...

If you are short and the tick spikes over +1000 -- time to cover cuz you are about to get run over. . .

dan said...

where do you get p/c data during the day? I check the cboe website but the data is delayed fairly substantially (by an hour or so). Thanks in advance.