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Friday, January 04, 2008

Brinker's 60-day Moving Average Put/Call Ratio Indicator Remains Bullish

One of Bob Brinker's sentiment indicator components is what he calls the "60-day put/call ratio." The CBOE (Chicago Board Options Exchange) Put/Call Ratio (CPC) is the ratio of the trading volume of put options to call options. Bearish investors buy put options that gain in value when the market goes down. Bullish investors buy call options that gain in value when the market goes up. A high put/call ratio is bullish for us contrarian investors.

The current reading for the 60-day put/call ratio is 1.00.

  • In January 2000, when Brinker last lowered his asset allocation to equities , the 60-day put/call ratio was 0.525
  • In March 2000, when the S&P500 peaked before the 2000-2002 bear market, the 60-day put/call ratio was all the way down to 0.475.
  • In November 2002, shortly after the markets bottomed in October 2002, the 60-day put/call ratio was 0.86
  • In March 2003, when Brinker returned to a fully invested position, the 60-day put/call ratio was 0.82
This chart shows the sixty day moving average of the equity put/call ratio.

Click chart to see full sized version courtesy of stockcharts.com

In his January Marketimer, Bob Brinker reported:

"The 60-day put/call ratio remains in bullish territory as the new year begins."

Brinker remains bullish, does not expect a bear market (as defined as a 20% or more decline in the S&P500) and he looks for new highs to be made in the year ahead.

Read:

If you want to read what Brinker said in his full update of this Marketimer stock market timing indicators, then you have to subscribe to Marketimer.

You can also read Bob Norton's free "estimate" of what Bob Brinker's timing model would do in "Bob Brinker Shadow Stock Market Timing Model Update." Brinker doesn't say if his individual indicators are bullish or bearish, but it seems Bob Norton made a direct hit with his estimate Brinker would remain bullish and fully invested.


2 comments:

  1. I believe the put/call ratio has outlived its usefullness as market setiment indicator. While I belive examining market setiment can be useful to detrmine if the market is too bullish or bearish, using the put/call ratio is the wrong factor... In the last few years, it has been common practice to purchase stock puts as an insurance hedge against a market correection rather than a general belief the market is due for a large fall. Purchasing puts today is similar to purchasing insurance on your house.. you are attempting to reduce the risk of loss rather than a general belief that your house will burn down... In any event the put/call ratio is an obsolete indicator and BB should look to something else to gage market setiment...

    ReplyDelete
  2. "In the last few years, it has been common practice to purchase stock puts as an insurance hedge against a market correection rather than a general belief the market is due for a large fall. Purchasing puts today is similar to purchasing insurance on your house.. you are attempting to reduce the risk of loss rather than a general belief that your house will burn down... "

    Don't insurance companies write the most new policies right after a major loss?

    I think Buffett's reinsurance company too a huge loss on the World Trade Center towers in 2001 but he more than made it up by talking up the threat of terrorism and selling new policies.

    I am pretty sure some people let their Earthquake insurance policies lapse (consider it a waste of money) as more years go without a quake and I bet the same is true for hurricane and flood insurance, but I admit I have no hard data. Perhaps someone does?

    ReplyDelete

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