Elevated Equity Put/Call Ratio Means Little on a Short-term Basis

Stock index futures gapped lower at the open Wednesday and never looked back, leaving an unfilled downside gap on the daily chart. Institutional selling was relatively mild considering the 3% down day for the S&P. TICKscore settled at -10, Cumulative TICK -29,000. Breadth closed 4:1 negative, although that wasn’t nearly enough to send the McClellan Oscillator back into even normal territory given Tuesday’s record high close. Despite the lopsided negative breadth, big board volume declined from Tuesday’s levels. In the past, a 3:1+ negative breadth session that coincided with declining volume was a fairly reliable 1-3 day buy setup, but accuracy has dropped off significantly in recent months. The table below lists the last thirty occurrences…

NYSE Decliners 3:1 over Advancers, NYSE Volume Down
01/07/09… ???
11/17/08… Higher SPX close one session later
11/14/08… No higher close within three sessions
11/05/08… No higher close within three sessions
10/27/08… Higher SPX close one session later
10/24/08… Higher SPX close two sessions later
10/15/08… Higher SPX close one session later
10/09/08… Higher SPX close two sessions later
10/07/08… No higher close within three sessions
09/22/08… Higher SPX close three sessions later
09/17/08… Higher SPX close one session later
09/09/08… Higher SPX close one session later
08/25/08… Higher SPX close one session later
07/24/08… Higher SPX close one session later
04/11/08… Higher SPX close two sessions later
03/10/08… Higher SPX close one session later
03/06/08… Higher SPX close three sessions later
02/14/08… Higher SPX close one session later
12/14/07… No higher close within three sessions
11/19/07… Higher SPX close one session later
11/15/07… Higher SPX close one session later
11/05/07… Higher SPX close one session later
05/10/07… Higher SPX close one session later
03/02/07… Higher SPX close two sessions later
01/05/07… Higher SPX close one session later
04/07/06… Higher SPX close one session later
08/05/05… Higher SPX close two sessions later
07/17/03… Higher SPX close one session later
06/23/03… Higher SPX close one session later
03/24/03… Higher SPX close one session later
03/10/03… Higher SPX close three sessions later

Note that accuracy has dropped to 26 out of the past 30 signals, for an 87% win ratio. While that may sound good, the bar is pretty high for setups that call for a higher S&P close within three sessions, especially in recent years. Consider that the at-any-time odds of a higher S&P close within three sessions has been 76% in the same period of time, which makes the 87% figure far less impressive. Needless to say, this one won’t be added to the board.

Speaking of indicators that don’t work on a short-term basis, the CBOE equity put/call ratio closed over 1.0 on Wednesday on a surge in put volume. The last few times we’ve seen readings of 1.0 or higher have led to a short-term bounce, but this hasn’t always been the case. Here’s a look at the last thirty instances in which the equity ratio initially closed at 1.0 or higher…

CBOE Equity Put/Call Ratio Closes >=1.0
01/07/09 1.07… ???
11/19/08 1.16… Higher S&P close three sessions later
11/06/08 1.01… Higher S&P close one session later
10/09/08 1.05… Higher S&P close two sessions later
09/15/08 1.18… Higher S&P close one session later
03/14/08 1.16… Higher S&P close two sessions later
03/06/08 1.12… Higher S&P close three sessions later
01/15/08 1.05… No higher close within three sessions
08/14/07 1.08… Higher S&P close three sessions later
04/15/05 1.00… Higher S&P close one session later
08/06/04 1.28… Higher S&P close one session later
07/06/04 1.00… Higher S&P close one session later
06/10/04 1.01… No higher close within three sessions
06/03/04 1.01… Higher S&P close one session later
05/20/04 1.02… Higher S&P close one session later
03/31/04 1.10… Higher S&P close one session later
10/31/03 1.03… Higher S&P close one session later
08/29/03 1.15… Higher S&P close one session later
03/28/03 1.32… Higher S&P close three sessions later
02/13/03 1.05… Higher S&P close one session later
02/10/03 1.10… No higher close within three sessions
02/05/03 1.08… No higher close within three sessions
02/03/03 1.10… No higher close within three sessions
10/16/02 1.15… Higher S&P close one session later
09/17/02 1.14… No higher close within three sessions
07/19/02 1.09… No higher close within three sessions
06/21/02 1.16… Higher S&P close one session later
02/15/02 1.08… No higher close within three sessions
09/20/01 1.21… Higher S&P close two sessions later
09/17/01 1.08… No higher close within three sessions
10/08/98 1.08… Higher S&P close one session later

Note that in only 21 out of 30 cases, or 70% of the time, did the S&P post a subsequently higher close within the next three sessions. That’s actually slightly worse than the 72% at-any-time odds for a higher S&P close within three sessions (in that same period of time).

Categories : Archived EOD Commentary, End-of-Day Commentary

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