One of my favorite contrary indicators is the put to call volume ratio of an individual stock security. Generally, a relatively high put to call ratio indicates that market participants are, on balance, very afraid of a price drop. A relatively low put to call ratio means that market participants are overwhelmingly convinced that price is going much higher.
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And the way to use this data is to look for extremes in these sentiment readings and know that they are contrary indicators. That is, when the preponderance of market participants are in strong agreement about market direction, they are about to get the surprise of their lives. LOL
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The SPY ETF will serve as our 'sentiment assessment' surrogate for the SP-500. What we note from today's data is that the put to call ratio is literally lower than any day in the past 12 months. This means that market participants are more 'certain' that the stock market will continue higher than any other day in the past year.
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Click on the charts to ENLARGE
The GLD ETF will serve as out 'sentiment assessment' surrogate for the precious metal Gold.
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This is a curious situation as the price of Gold has literally gone nowhere in the past 9 weeks. Yet 9 weeks ago, investor sentiment was extremely bearish with a sky high put to call ratio of 1.30.
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Today we see that sentiment has completely reversed extremities. Now it is extremely bullish as represented by a low put to call ratio of .80. Yet the price is virtually the same - $135.
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As a contrary indicator, this GLD data, as with SPY, strongly suggests that a correction of significance is coming to both the stock market and Gold - and soon.
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John,
ReplyDeleteWhere do you get the put/call data for gold?
Thanks for all you do.
joe
http://www.schaeffersresearch.com/streetools/indicators/equity_volpcratio.aspx
ReplyDeleteIf the price of gold did not go up when the put/call was "extremely bearish - sky high at 1.3" - why on earth will it go down when it is "extremely bullish at 0.8"? This makes no sense! Is it possible that the put/call is rather useless in predicting the future price movement?
ReplyDeleteDan -- perhaps I could have stated that differently as follows: when market participants are extremely bearish, they buy more puts than calls. A reading of 1.3, for example, would demonstrate a sky high degree of bearishness. Conversely, when market participants are bullish about a particular security, they buy more calls than they buy puts. This results in a reading of less than 1.0. for example, .8
ReplyDeleteWhen these considerations are used as a contrary indicator, a high reading of 1.3 - excessive bearishness, for example - is considered bullish. And a comparatively low reading of .8 - a significant shift in sentiment in the bullish direction - is considered bearish.
Dan, as for your thought that the put/call ratio is rather useless in predicting the future price movement, you may certainly believe whatever makes sense to you. The chart shows you what happens to price when the ratio swings from one extreme to the other and you can come to whatever conclusion makes sense to you.
My observation is that extreme shifts in sentiment has a significant impact on future price direction. And honestly, this understanding has made me a lot of money.
Hi John and thanks for your reply,
ReplyDeleteI understand perfectly well the concept of put/call ratio...my problem is simply that if this works, then gold should have gone seriously higher 9 weeks ago, when sentiment was extremely bearish - but it didn't - so now I am questioning why is it about to go the other way based on this indicator going the other way, in other words: if it didn't work 9 weeks ago, why should it work now?
Anyway, this is all academic, since you have now come to the conclusion that they are going higher based on RSI momentum and money flows...and now you also noticed that the $US is going down...my head is spinning - I am sure yours is too! too many conflicting indicators!
Hi Dan -- you make a very sensible argument and I quite agree with you. What I agree with is this: nothing, and I mean NOTHING, works all the time. I wish it were otherwise, but that would make this too easy, unfortunately.
ReplyDeleteA profoundly true quote about the stock market is this: "In the stock market there are no certainties. Only probabilities".
When I can across this statement last week I nearly decided to put it as the title on my blog page, because it so perfectly brings all investors down to their knees where they need to be to succeed.....starting with myself.
Your head has been spinning from all this conflicting information, as has mine.
As I have written, what works most of the time does NOT work all of the time.
If the FED is giving away literally billions of dollars DAILY - using those dollars to interfere with the free markets by causing an artificial supply and demand imbalance - it really does not seem to matter what % of investors are bullish and bearish - at least in the short run.
As this new money is put into the system, it tries to find a home to earn a return - including the stock market.....and it makes the short term situation very contrived, even somewhat unpredictable.
But I'll tell you this: in the end, you never get something for nothing. This manipulation and skewing of normal supply and demand will come with a terrible price. We saw this 'readjustment to truth' last spring with the 'mini-crash' that no one could seem to explain. And we will see it again this spring, I believe, and no one will be able to explain it again.
My explanation is that sooner or later, the law of truth, or whatever one wishes to call it, does take its turn.
At some point people will realize again that this money printing, while it made for a Merry Christmas in 2010, has not resulted in more jobs being created, HAS resulted in higher commodity prices (inflation), and HAS significantly eroded the profitability and growth of American companies.
Sorry to ramble on so long Dan. I wanted to communicate that I honor your points as valid, recognize you understandable frustration with too many conflicting indicators and share with you my own way of framing these issues in my mind so I can go on and do my best today and tomorrow.
Finally, gold has traded just above and below $1385 for some 9 weeks now. You can literally draw a horizontal line at that price point and see what I mean. This tells me that we are not alone in trying to make sense of future price direction. The ENTIRE world trades gold.....and for 9 weeks the world has not known what to make of it. What I am saying now is that it appears that a 'decision' of sorts has been made - and though I may again be wrong - it appears to me that the decision is dollar down, gold up.
God help us all, eh?