I published a study 2 days ago demonstrating What happens next to the stock market when the Put/Call Ratio is very low. Long story short, here were the S&P 500’s forward returns.
So contrary to popular belief, this is a medium term bullish sign for the stock market. Why? Because big declines don’t begin when momentum is extremely strong, investors are insanely bullish and traders are very bullish. Big declines are preceded by bearish divergences: a weakening of momentum while the stock market rallies.
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The Put/Call Ratio has once again sunk after a brief bounce. Traders are once again very bullish on the stock market.
When the Put/Call Ratio is consistently this low, it means that:
- The stock market could swing sideways or pullback in the short term (1-2 weeks), BUT…
- The stock market’s medium term is bullish.
Here’s what happens next to the U.S. stock market when the Put/Call Ratio is 0.5 or lower for 3 times in the past month (i.e. Put/Call is consistently low).
Click here to download the data in Excel.
- The stock market’s short term could either lead to a pullback or sideways consolidation, but…
- The stock market will make new all-time highs in the next few months.
Essentially, an S&P 500 chart that looks like this is the most likely path.
This supports our other recent market studies.