Info!! Touchstone Stock Marketplace Consider Alongside The Index Put/Call Ratio

The recent post took a expect at the Equity Put/Call Ratio (the ratio of position majority to telephone phone majority for all listed options of private stocks across all exchanges) too what it tells us nearly the market.  Above nosotros run into a five-day moving average of the Index Put/Call Ratio (the ratio of position majority to telephone phone majority for all listed options of stock indexes; information from e-Signal).  Interestingly, the 2 ratios since 2014 bring correlated exclusively .25, which way that they portion a lilliputian over 6% of full variance.  This suggests that the 2 measures component subdivision differently vis a vis sentiment.  If a portfolio director has a long/short majority too wants to speedily hedge a internet long position, buying index puts could locomote a quick way of accomplishing that.  If that same director wanted to limited a catch inwards a unmarried cite or hedge a directional exposure to that detail stock, the options for that stock would locomote the most effective expression, liquidity providing).  

Another interesting characteristic of the Index Put/Call Ratio is that it has varied wildly over recent years.  In 2007, nosotros routinely saw 20-day averages inwards a higher house 1.70.  As yous tin ship away run into from the nautical chart above, nosotros bring never seen such a high reading during the menses since 2014 too indeed bring non seen that variety of reading since 2010.  We fifty-fifty bring an event of variation inwards the ratio inwards the recent data.  Note how, since the Oct 2014 drop, nosotros bring seen higher put/call ratios than before inwards the year.  In other words, coin managers are doing to a greater extent than hedging instantly than before inwards 2014.

The absolute values of the Index Put/Call Ratio create incorporate information, merely it's tricky given the wandering hateful of the distribution too the correlation to concurrent cost change.  Since 2014, the Index Put/Call ratio has correlated -.56 amongst the percent of SPX stocks trading inwards a higher house their five-day moving averages.  This is what nosotros saw amongst the Equity Put/Call Ratio:  in that place is a vogue to purchase puts subsequently brusque term declines too vice versa.  Sentiment is quite sensitive to recent cost movement.

Since 2014, when the Index Put/Call Ratio has been inwards a higher house 1.0, the side past times side 5 days inwards SPX bring averaged a make of +.68% vs. +.22% for the residual of the sample.  When either the Index or Equity Ratio (or both) bring been inwards a higher house 1.0 (87 trading days), the side past times side 5 days inwards SPX bring averaged a make of +.82% vs. no alter for the residual of the sample.

In short, it does look that options ratios country us something nearly sentiment; that index options reverberate unlike persuasion issues than equity options; too that teasing apart the ratios from recent cost alter mightiness furnish a purer mensurate of the value of options-based persuasion every bit a predictor of short-term cost action.

Further Reading:  Measuring Sentiment Intraday 
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Info!! Trading Notes: Calendar Week Of 8/24/15

Friday, August 28th

*  Buying weakness yesterday ended upwards beingness a useful strategy for much of the day, exactly a potent selloff as well as and thus buying reversal inward the concluding 2 hours of the trading session made for volatile trading.  I hold to await these volatility aftershocks to endure amongst us, equally noted inward Wednesday's post.  That beingness said, the pure volatility mensurate has been mostly trending downwards over the yesteryear several sessions, though it's yet at historically high levels.  

*  The blueprint of improving breadth has continued.  Interestingly, nosotros had 131 stocks across all exchanges register fresh novel monthly highs as well as 136 brand novel lows.  That novel depression figure compares amongst 726 as well as 840 during the prior 2 sessions as well as 3553 at what appears to endure a momentum low.  As long equally nosotros encounter higher prices, potent NYSE TICK readings, as well as improving breadth, my game innovation is to purchase weakness, specially if it tin arrive at the axe concord higher upwards the overnight lows.

*    Pertinent to the number of declining, exactly yet high volatility, is the pass upwards inward book inward SPY over the yesteryear several sessions.  We peaked at 507 1 chiliad m shares traded on Monday, as well as thus roughly 369, 339, as well as 275 1 chiliad m the yesteryear iii days.  One of my quant routines estimates the probable day's arrive at (very helpful for establishing cost targets on trades), amongst book equally a major input.  By seeing how today's book unfolds, nosotros tin arrive at the axe approximate the probable day's book as well as brand informed estimates equally to probable cost arrive at for SPY.

*  H5N1 mensurate of the breadth of marketplace position clit that I rails daily is the number of NYSE shares that arrive at purchase vs. sell signals for diverse technical measures.  Yesterday nosotros had 520 purchase signals vs. 20 sells for the Parabolic/SAR measure.  We've had xi occasions where we've had over 400 purchase signals on that mensurate since June, 2014, when I began collecting the data.  Three days later, SPY has been upwards viii times, downwards 3 for an average gain of +.49%.  It's equally good pocket-size a sample to hang our hats on, exactly does serve equally a overnice reminder that potent upside thrust leading to a short-term overbought province of affairs (over 90% of SPX stocks are higher upwards their 3- as well as 5-day moving averages) does non necessarily atomic number 82 to "mean reversion".

Thursday, August 27th

*  Per yesterday's post, nosotros did indeed encounter a seek out of lows inward Wednesday's session, followed yesteryear important buying.  The NYSE TICK has provided really practiced tells for the recent marketplace position action, equally wide downticking was followed yesteryear wide upticking really early on inward yesterday's rally.  That clit has continued into the overnight, all of which is consistent amongst the view of having position inward a momentum depression per Tuesday's comment.

*  Another practiced state inward yesterday's merchandise was the continued drying upwards of the number of stocks making fresh novel lows on weakness.  We had 726 monthly lows across all exchanges yesterday versus 840 on Tuesday as well as 3553 (!) on Monday.

*  The pure volatility mensurate continues at high levels, suggesting that book as well as volatility powerfulness endure amongst us for a while.  We remain higher upwards xxx inward VIX, off the highs exactly significantly elevated relative to close of 2015.

*  I notice that the psychological issues faced yesteryear traders inward this recent marketplace position are related to difficulty adapting to the recent changes of trend, correlation, as well as volatility.  Per the recent Forbes article, a big purpose of emotional upheaval inward trading comes from the mismatch betwixt the patterns we've operate out accustomed to seeing inward markets as well as the novel patterns that are playing themselves out inward electrical flow marketplace position action.

*  I regime annotation that 89% of SPX stocks are right away trading higher upwards their three-day moving averages, exactly alone a piffling over 2% are trading higher upwards their 10-day averages.  I await that latter number to growth significantly, equally our correction from the recent weakness plays itself out inward fourth dimension equally good equally price.  My game innovation is to endure opened upwards to buying weakness equally long equally nosotros remain higher upwards the overnight lows.

Wednesday, August 26th

*  The pause of the 1920 degree inward ES referenced yesterday showed us that the mainland People's Republic of China cutting was non a game changer, as well as nosotros continued the volatile downward market.  Interestingly, fewer stocks made fresh novel lows yesterday relative to the twenty-four hours previous.  Specifically, nosotros had 3553 monthly lows across all exchanges 2 days agone as well as alone 840 yesterday.  This would endure consistent amongst having position inward a momentum low, which on major declines tin arrive at the axe precede ultimate cost lows yesteryear weeks or fifty-fifty months.  

*  Yesterday nosotros had fewer than 5% of all SPX stocks trading higher upwards their 3, 5, 10, 20, as well as 50-day moving averages.  Going dorsum to 2006, at that spot bring alone been iv occasions inward which we've seen similar wide weakness:  10/7 as well as 10/9 of 2008; 11/20 of 2008; as well as 8/8 of 2011.  Over the adjacent iii trading days, SPY moved -9.74%; 9.68%; 13.95%; as well as 4.75%, respectively.  Note the really high volatility going forward.

*  Note also that the dates higher upwards did non brand ultimate cost lows for a number of months, exactly ultimately led to major bull marketplace position moves.

*  I am warning for the possibility of our putting inward lows close term as well as am watching that 1830-1850 degree inward ES closely.  I would await the combination of brusk roofing as well as value buying inward the high volatility surround to create a major snapback rally from these really oversold conditions.

Tuesday, August 25th

*  The volatility warning proved useful for Monday's trade, equally nosotros blew out to a VIX of forty yesteryear the unopen as well as traded amongst a daily truthful arrive at inward excess of 8%.  We traded good off the day's lows, inviting the hypothesis that we've seen a momentum depression for this downwards move.

*  Contributing to the view of a momentum depression is the unusually broad, weak breadth.  Over 400 SPX stocks made fresh 20 twenty-four hours lows yesterday.  We haven't seen that form of wide weakness since early on August, 2011.  That indeed was a momentum low, exactly regime annotation that stocks drifted lower, albeit amongst fewer stocks registering novel lows, for a yoke of months after that.

*  I volition endure watching commodities closely, equally these bring been a useful warning for EM equity weakness as well as weakness inward States of America stocks.

*  I volition also endure watching the ES 1920 area, equally that was the close recent depression prior to the mainland People's Republic of China statement of a reserve ratio cut.  If that displace yesteryear mainland People's Republic of China was a game-changer, that degree inward ES should hold.  Game innovation is to purchase weakness that holds higher upwards that 1920 level.

Monday, August 24th

*  There's a really primal betoken toward the destination of the recent Forbes article:  many times what nosotros translate equally a trading occupation genuinely represents *information*.  For example, the trader who has difficulty pulling the trigger may really good intuit that the marketplace position surround has changed as well as that what had been practiced risk/reward may non endure thus at the moment.  Similarly, frustration could endure a really practiced early, emotional signal that regimes bring changed.  We pass a lot of fourth dimension trying to preclude as well as fighting emotions inward trading when mayhap nosotros should endure focused on learning from them.

*  With honour to the recent article, also regime annotation the v things I facial expression for to position changing regimes.  Very helpful inward adapting to marketplace position conditions.  These volition endure relevant 1 time we're cook for the conduct to turn.

*  We hold to encounter cost behaviour that is wildly unlike from what nosotros seen through close of 2015.  For example, from midnight to viii AM EST thus far today, we've printed 150 bars based upon 500 ticks of cost movement.  By contrast, on the Mon 2 weeks ago, from midnight to viii AM nosotros printed half-dozen such bars.  My pure volatility mensurate continues to brand novel highs, important that we're getting to a greater extent than crusade from to a greater extent than volume, exactly also to a greater extent than crusade per unit of measurement of volume.  This makes gamble management tricky, equally nosotros tend to rely on the same fourth dimension frames for asset periods without realizing that asset a merchandise for a sixty minutes right away is similar asset for a twenty-four hours before inward the year.

*  We closed Fri amongst fewer than 5% of SPX stocks trading higher upwards their 3, 5, as well as 10-day moving averages.  That form of wide short-term weakness has been to a greater extent than typical of 2010 as well as 2011 markets than recent ones.  Very often, when we've had such wide weakness, the showtime thrust downwards has been followed yesteryear farther weakness, which is what we've seen overnight.  I hold to favor selling bounces until there's approximately evidence that selling pressure level cannot hold to yield weakness across the vast bulk of sectors.
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