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Index Put/Call Ratio spiked. What this Means for the Stock Market

Stock-Markets / Stock Markets 2018 Sep 11, 2018 - 01:55 PM GMT

By: Troy_Bombardia

Stock-Markets

The CBOE’s Index Put/Call Ratio spiked yesterday to 1.78

The Index Put/Call Ratio (CPCI) is different from the Equity Put/Call Ratio (CPCE). The Index Put/Call Ratio measures index options as opposed to equity options. For a more detailed explanation, go to Stockcharts.

The stock market made a short-medium term rally the last 2 times the Index Put/Call Ratio spiked to at least 1.77


*I find it particularly interesting that the Index Put/Call ratio didn’t spike on the February 2018 low. Instead, it spiked on the March 2018 low (second retest bottom).

Here’s what happened next to the S&P 500 (historically) when the Index Put/Call ratio spiked to at least 1.78 for the first time in 1 year.

This study has a very small sample size (data only begins from 2003). We’re going to increase the sample size by relaxing the parameters.

Here’s what happened next to the S&P 500 (historically) when the Index Put/Call ratio spiked to at least 1.78 for the first time in 3 months

As you can see, this can lead to some short-term weakness, but the next 3-6 months are more bullish than bearish.

Why is this not a consistently short-term bullish sign for the stock market? Isn’t a spike in the Put/Call ratio “supposed” to be short term bullish for stocks?

The Index Put/Call Ratio is more associated with professionals and institutions who are buying puts as a hedge against their long positions. A spike in the Index Put/Call Ratio means that professionals (who aren’t consistently “smart money”) are buying a lot of Puts in case the market falls in the short term.

Click here for more market studies

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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