$CPC, the CBOE Options Total Put/Call Ratio is slowly advancing. $CPC is a sentiment indicator showing the Put volume relative to the Call volume. It is increasing when more Puts are trading than Call options. This means that investors are expecting a bearish development in the future. Also notice below the chart that the correlation coefficient to the S&P 500 index is -.20 and turning up. Normally the 20-period correlation coefficient is less than -.50.
The chart below shows the 50-day and 200-day moving averages for $CPCE, the CBOE Equity Put/Call Ratio. There is also the 200-day Bollinger Band with the 0.6 standard deviation bands. The S&P 500 index, $SPX is in the background for refernce. The chart starts in 2004. As you can see the 50-day moving average pretty much stays in the 0.6 standard deviation Bollinger Bands around the 200-day moving average. Notice how the 200-day moving average is moving lower and lower soon reaching low levels only mached in 2006 and 2011 on the chart. Also notice that the 50-day moving average is touching the lower Bollinger Band. In the past touching the lower band was followed by a sharp move higher.
The chart below shows $CPC, the total Put/Call ratio with the 10-day moving average. When $CPC is moving higher investors are buying more puts than calls and they have bearish bias. $CPC is a sentiment indicator and is mostly negatively correlated to the S&P 500 as you can see below the chart. $SPX, the S&P 500 index is in the background.
The Put/Call Ratio is simply the Put Volume divided by the Call Volume:
Put/Call Ratio = Put Volume / Call Volume
The Put/Call Ratio can be calculated for individual securities or a large number of stocks or indexes or both. The Chicago Board Options Exchange (CBOE) has three popular Put/Call Ratios, the $CPCE is the Equity Put/Call Ratio, the $CPCI is the Index Put/Call Ratio and the $CPC is the Total Put/Call Ratio. The Total Put/Call Ratio often moves above and below the 1.0 horizontal line. Depending on market conditions the range of the Put/Call Ratio can change over time.
Investors are buying more puts to hedge against market weakness or bet on a decline. Calls are purchased to bet on market advance. When investors are extremely bullish the Put/Call Ratio reaches low levels and when they are extremely bearish it reaches high levels.
In this sense the Put/Call Ratio can be used as a sentiment indicator. It also can be used as a contrarian indicator. Extreme low levels on the Put/Call Ratio could be a sign of possible market decline and extreme high levels of Put/Call Ratio could be a sign of possible bullish reversal.
Currently $CPC, the Total Put/Call Ratio is on low level if we compare it to other lowest levels this year. This could be the sign of a short term bearish reversal.
See the chart below with the 10-day and 200-day SMA and with $SPX in the background. There is also a 1.0 horizontal line. The Correlation Coefficient shows that for the most part the correlation between $CPC and the S&P 500 is negative.
What the Fear & Greed Index is telling us? Click here for the source.