Light on a Trap Door ~ The Risk Averse Alert

Tuesday, February 28, 2012

Light on a Trap Door

Presented here earlier this month was a chart of the CBOE Put/Call Ratio showing an aspect of its position over the past three years coinciding with market tops. Specifically, whenever the momentum at which the ratio was falling measured a relatively marked bias in call option activity, the market's turn lower soon followed.

Now, these prior noted instances have turned out to mark the onset of but interim declines over the course of the market's counter-trend rally off March '09 bottom. So, then, maybe that is why over the past few months on several occasions we have seen this same condition appear. To wit, maybe this signals that, what's being anticipated is not an interim decline, but rather resumption of the downward trend begun for many major indexes in 2007, and for one in 2000.


The market's relatively tight trading so far this year certainly finds the CBOE Put/Call Ratio testifying to a balance between buyers and sellers, of which among both, of course, there are increasingly fewer. Likewise finding balance right now is the put/call ratio's momentum (bottom panel).

Following the already noted triple whammy momentum extremes, occurring in rapid succession since late-October, and now seeing the put/call ratio's momentum in balance and, indeed, turning positive, and this while the ratio itself diverges in a manner typical at tops, well, isn't that interesting when you're someone thinking a trap door soon could be sprung, and send the market into a terrible tailspin...

Fast Money
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