Something I’ve been noting over the past few weeks is the steadily rising Equity Put/Call Ratio 10MA. As a signal alone, a CPCE near its upper weekly Bollinger is one of the better breadth conditions I have found that can put me on alert to buy when the main DTL is breached. The vast majority of the time, Equity PCR rises during a pullback or correction, but it very rarely gets near the upper weekly bollinger when price has not pulled back a few percentage points first. In fact, in all the data I could view back to 2004, it has only happened five times. These occurrences have a few characteristics in common.
- High numbers of stocks that are trading above their 200 day MA’s
- Tends to follow some kind of extended run up.
After the S&P500 has had a good run, it’s only natural to start thinking that price has come so far that it’s getting a bit long in the tooth and perhaps a correction is right around the corner. The problem is that when too many traders and investors start considering hedging their bets and putting on some put protection most of you know what happens when there are too many leaning towards one opinion. Of course, it has a lower probability of happening. Especially when you consider these hedges decaying and keeping a passive bid under SPX where most hedging occurs.(more…)