Hedging in a Transitioning Market ~ The Risk Averse Alert

Thursday, May 17, 2012

Hedging in a Transitioning Market

The CBOE Put/Call Ratio is one measure already rivaling its August 2011 peak coinciding with the market's steep sell-off early that month. As such, prospect of a double-digit percentage setback over the next few days is on the radar. According to this measure, it's now or sometime later, after a temporary bottom forms and a bounce subsequently develops (which contrary end its present, elevated level might otherwise be signaling).


A couple "big picture" observations worth mentioning. First was put forward here long ago and deserves consideration again at this moment prospectively finding the market at the edge of the abyss. A put/call ratio upward of 2-1 (or higher) in all probability will coincide with the ongoing corrective phase of the market's 1974-2008 advance. Countless times over the duration of that advance calls dominated puts traded on the CBOE by a 2-1 ratio. So, the flip side might become a dominant trait as correction of the market's multi-decade advance proceeds over months ahead.

Thus, too, the CBOE Put/Call Ratio's present state just as well could indicate the market is not yet adequately hedged, this to the effect of poising the market for a bounce. At this point in the market's ongoing correction of its multi-decade advance — prospectively at the start of a hard turn south reasserting an unfolding corrective wave's full force — status quo hedging might not be sufficient. So, heads up per this possibility in relation to today's elevated put/call ratio.

Supporting the view that, underway might be transition to a corrective wave's nasty phase is the CBOE Put/Call Ratio's upwardly trending bias of the past couple years, this particularly as the S&P 500 proceeded to move higher over the interim. We have seen this divergent bias prove a negative a number of times over short-term intervals (January 2010, April 2010, July 2011). Whether meaningful or not over the longer duration indicated above, the mere presence of this divergent put/call ratio bias seems fitting scenery in the lead up to the market's fall over the precipice...

Fast Money
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