Put Call Ratio Spike Lower Suggests Excessive Bullishness

Markets closed strongly in the green today after a mostly red open and early sluggish action. Even the slightest weakness continues to get bid up.

We’ve closed higher 5 days in a row in the S&P500 and it’s clear on nearly any market indicator that we are in overbought territory.

Today, we have our newest confirmation that sentiment is near-term excessively bullish, based on the closing total put/call ratio seen below.

Image of CPC Ratio - The Trade Risk Evan Medeiros Swing Trade Alerts

For those not familiar with the put call ratio, it’s simply a measure of the total option put volume relative to the call volume.

When this indicator falls below 0.70, it’s historically considered extreme.

Taken directly from stockcharts:

As with most sentiment indicators, the Put/Call Ratio is used as a contrarian indicator to gauge bullish and bearish extremes. Contrarians turn bearish when too many traders are bullish.

You can read more about the put/call ratio in this article.

So What do we do with this put/call information?

As I mentioned above, there is currently a long list of indicators screaming similar ‘extreme’ overbought readings. To name a few:

  • SPY up 5 consecutive days in a row.
  • SPY trading above the upper bollinger band.
  • The percentage of stocks above 10SMA above 1 standard deviation.
  • Put call ratio in excessive territory.

and i’m sure there’s more.

All of these indicators and data points give us context about the market environment, and currently they all point to extreme strength. 

Extreme can be considered unsustainable, but equally important is strength.

For my style of trading, this means, let long positions run and continue to reduce exposure into strength.

Secondarily it means, look for tactical short opportunities when the price action presents itself. Just because we see extreme readings, doesn’t mean they can’t get more extreme.

The market likes moving beyond extremes in an effort to capitulate and frustrate the majority, so it’s important you don’t begin fighting the trend too early or get stubborn.

Hopefully this helps, and if you need assistance navigating these markets, consider learning more about our premium services.

Thanks for reading and good luck out there.

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Evan Medeiros

Evan is the founder of the Trade Risk. With 25 years of coding experience and a B.S. in computer science, Evan brings a systematic discipline to investing in the stock market.

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