THIS SENTIMENT INDICATOR IS A BEAR’S WORST NIGHTMARE

History rhymes and so do bull markets. The 90s bull offers the astute investor a grab-bag of tidily wrapped treats for the taking. The treats come in the form of snippets of information that hint to us what to expect from a technology led bull market that is doubted, lambasted and scoffed at for most of the way up. 

With this in mind, I present quite possibly the only sentiment indicator that should be in the toolbox of an investor: The put/call ratio. What you see below is a moving average only version of the put/call going back nearly 20 years. You will immediately notice that we have not even started to dent the skeptic sentiment that marks important tops for secular bull markets. Instead put buyers remain resilient in their conviction that every 5% pullback will turn into a 25% pullback. A bear market will emerge. The skeptics will fly high above the city merrily cheering as the optimists are herded back into their lives of perpetual peasantry. 

The chart below flys in the face of this type of thinking while telling us exactly why the pullbacks are so short lived. In three words: Too many bears. 

click chart to enlarge

Put/call ratio

Put/call ratio

 

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