*I apologize for the delay: this study should have been published last Tuesday, but I was busy in New Zealand. It is still timely for today.
The Equity-Only Put/Call Ratio was very low last Tuesday, falling below 0.5 for the first time since January 2018. This is commonly seen as a bearish sign. It isn’t. Here’s the data to prove it.
When the Put/Call Ratio becomes this low for the first time in 4 months, it is actually a short and medium term bullish sign for the stock market.
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Click here to download the data in Excel.
Keep in mind that this study is as of last Tuesday. Historically, the stock market went up 90% of the time on a 2 weeks forward basis. And so far it has – the stock market is up since last Tuesday.
So how does this square with the short term bearish studies we presented yesterday?
The stock market tends to fall a little 1-2 weeks after a rate hike (to be expected this Wednesday).
VIX has fallen to 12. A 2 week decline in the S&P would not be unexpected:
I previously thought that the stock market would probably make a small 1-2 week pullback before heading higher in the medium term. I’m slightly revising that outlook.
Instead, I think that the S&P 500 will probably swing sideways below its current resistance for a week or 2 before heading higher. Remember, “short term weakness” doesn’t mean that the stock market has to make a sizable pullback. A sideways consolidation counts as “short term weakness” too.
But going back to the Put/Call Ratio study, we can see that this is also a medium term bullish sign for the stock market. When the Put/Call Ratio becomes this low for the first time in 4 months, it’s a sign that the stock market’s bullish momentum has returned.
Look at the S&P 500’s returns on a 2 months and 6 months forward basis.
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