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CBOE Equity Put to Call Ratio in Bear Territory


Checking the chart, be wary of excessive optimism.


Lately I have been dipping my toe in the water on the short side – only to discover that something resembling an alligator seems intent on severing my leg at the ankle. Fortunately, I've managed to keep the stakes low to this point, but during today's session I took a much more aggressive stance and bought a large quantity of puts.

In the process of reshaping my thinking, I found two indicators in particular to be persuasive. The first is the TRIN, where I am partial to using a 10 day EMA to smooth the data. Today it closed at a level seen only once since the beginning of 2006, just as the market put in a short-term top after a week and a half of bouncing off of the March lows.

Even more persuasive is the CBOE equity put to call ratio (CPCE), where the 10 day EMA hit a low of 0.51 – a level which has not been seen since the October 2007 top. The chart below shows that a low CPCE warned of excessive optimism and the possibility of a top first in July 2007, when the SPX began to form the first half of a double top and again in October 2007, just as the market was topping for the second and final time.

Click to enlarge

For a different take on today's CBOE equity put to call ratio, I can highly recommend Market Recap: CPCE a little too low again, from Cobra's Market View.

For some related VIX and More posts on the CPCE, try:

No positions in stocks mentioned.

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