US Index Open Interest Put / Call Ratio Analysis
The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, January 5th, 2009.
Well, Santa has come and gone and provided those who bet on a Christmas time rally a nice return, the best ever in fact with respect to the broads. After such an outcome, it's traditional to see a pullback to work-off an overbought condition when the majority of traders return from holidays, so don't be surprised if the broad markets fall early this week. Given continued high and rising US index open interest put / call ratios however, updated here for your review, any weakness in coming days should be temporary, with further squeezing into expiry only two-weeks away now anticipated in knowing speculators have turned increasingly bearish. A review of Figures 1 through 7 in the attached above is the basis of this conclusion.
Unfortunately everything else is all down hill from there however, with a collapsing ratio on the Russell 2000 (RUT) suggestive small caps will not enjoy much of a rally at all, reflected in Figure 9. In terms of ratio related analyses, of which I will comment further later this week, having large caps continue to outperform small stocks will confirm the bearish picture taking things into spring if such a profile is maintained. So, it will be interesting to see if the collapse in the RUT's put / call ratio in December was only a reflection of January Effect related positioning by small investors, or not. Continued low readings in the Triple Q (QQQQ) are suggestive this might be the case, as seen in Figure 8. If this condition is corrected in February after a disappointing performance this month however, such an outcome would provide fuel to extend the rally in stocks into April in mirroring the 1929 / 1930 post crash sequence.
And we are hoping for a change in heart amongst crude oil and precious metals investors post options expiry next week as well, where speculators have never been more bullish on the former, which is now evidently rubbing off on the later group due to gold and silver equities outperforming since November. This is evidenced in last week's turn lower in the Philadelphia Gold And Silver Index's (XAU) put / call ratio (see Figure 13), which again, is at least short-term bearish if not reversed quickly. If not, the rotation guys will continue to spin out of precious metals, which if accompanied by a continued reversal in the XAU's put / call ratio, could spell real trouble if traction is not regained prior to April given larger degree sequential considerations. (i.e. the larger degree correction higher in stocks is anticipated to fade as spring is sprung.) Further to this, we are also watching for a reversal lower in the Amex Gold Miner's ETF (GDX) (see Figure 12) as well, which would be particularly bearish considering readings never made it above unity.
In translating above perspectives into an action plan of what you should do for now then, without a doubt both the energies and precious metals should be faded immediately until more is known post expiry on the 16th. (Note: It's not the 18th as the good people [heavy on the sarcasm] over at Microsoft would have you believe.) And while continued strength in the broads and talk of escalating tensions in the Middle East could maintain a bid in crude temporarily, it has been my experience playing with fire will burn you, so unless you enjoy such outcomes, the risk associated with long positions in energy related ETF's knowing speculators have never been more bullish on oil should be considered untenable, and avoided for now. Again, things could change post expiry on the 16th, but for now, caution is warranted.
In terms of precious metals shares, in using them as a leading indicator for larger degree moves in the sector, watch for the December 22nd lows to be taken out, where if such an outcome does in fact take place, it will be possible to apply bearish counts to the larger sequence(s) (zigzags) across the sector coming out of the November lows. For the XAU, this would be 107.56, which as you will remember from recent analysis associated with the monthly plot, has now become support, formerly being trend-line resistance. And for the Amex Gold Bugs Index (HUI), this number is 263.59. Here, if this support is taken out, followed by a plunge through the large round number at 250, then a trip down to the 200 area would likely be in store, at a minimum. It could of course get worse than this if speculators were to become increasingly bullish during the drop, and the same was to return to broad market sentiment.
Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our continually improved web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented ‘key' information concerning the markets we cover.
And if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.
Good investing all.