SURPRISE: CALL BUYERS RETURNING TO THE MARKET MAY NOT BE AS BEARISH AS ADVERTISED
The following is the aftermath of the last three incidences of the 20 day moving average of the put/call ratio pulling back 25% from its highs after an abnormally long period of time.
In my research, it typically takes 2-3 months for market participants to go from fear driven, excessive put buying to warm and fuzzy call buying. There are rare instances when it takes longer than 3 months. This typically signifies that there is an excess amount of skepticism in the marketplace, as call buyers are reluctant to return to the marketplace. I outlined this study in detail this past week.
There have been three instances of a prolonged reversion (longer than 3 months) of the 20 day moving average taking place over the past decade: 2004, 2006 and 2010. I bring this up because we are on the verge of meeting the 25% threshold currently over a prolonged period (longer than 3 months) of time. What can we expect out of the current market now that call buyers have returned?
Here are the charts from each of the three incidences over the past decade:
click chart to enlarge
2004-2005
2006-2007
2010-2011
If this study holds correct, then we can expect a top to approach around the April-May time frame, with the Dow seeing 13,000 and the S&P 1350 before all is said and done.
