Equity Put/Call Ratio Triggers a Sell
By
Rennie on Monday, June 7th, 2010 at 9:05 pm
Major averages fell more than 1% Monday, not quite hitting the 2% threshold noted in this weekend’s column that would have triggered the ‘crash alert’ signal. If we loosen the requirements of the crash signal discussed Sunday and only look for a 1%+ selloff after a 3%+ down day, we find a little more than twice the number of occurrences. Over 62 cases since 1900, 41 led to a subsequently lower Dow close within the next three days. That 66% win rate is well below the 88% accuracy utilizing the 3%/2% combination and provides no edge over random. However, 34 out of 62 occurrences (55%) did lead to a 3%+ down day within the next five sessions. Those are still high odds considering the random chance for such a steep selloff is virtually nil. So while we might bounce short-term, it’s too soon to say we’re out of the woods.
The S&P500 (cash) posted its second consecutive session below the ‘flash crash’ low from May 6th. That level was defended pretty aggressively on the first and second tests, but not so much this time around. TICKscore closed at -49 as institutions remained better sellers, sending the Cumulative TICKscore line down near its May low. NYSE breadth closed nearly 3:1 negative, sending the Cumulative Breadth line below its May lows.
The 10-day moving average of the CBOE equity put/call ratio crossed back under the .60 level on Monday, a bearish indication for the intermediate-term. This usually occurs as the market is rallying, so it could be a sign of just how weak the market is that the S&P is lower now than when the 10-day average peaked back on May 26th. In the table below I’ve extracted every instance since 2003 in which the 10-day average of the equity put/call ratio closed below .60 (date on the left), followed by the date when the average rose back over .60 and the performance of the S&P500 in this time frame…
CBOE Equity Put/Call Ratio 10day Avg & the .60 Level
06/07/10 Under 1050.47… ??/??/?? Over
03/10/10 Under 1145.61… 05/07/10 Over 1110.88… S&P -3.0%
01/04/10 Under 1132.99… 01/22/10 Over 1091.76… S&P -3.6%
11/16/09 Under 1109.30… 11/20/09 Over 1091.38… S&P -1.6%
10/14/09 Under 1092.02… 10/28/09 Over 1042.63… S&P -4.5%
09/16/09 Under 1068.76… 09/30/09 Over 1057.08… S&P -1.1%
08/20/09 Under 1007.37… 09/04/09 Over 1016.40… S&P +0.9%
08/07/09 Under 1010.48… 08/19/09 Over 996.46… S&P -1.4%
10/09/07 Under 1565.15… 10/19/07 Over 1500.63… S&P -4.1%
07/10/07 Under 1510.12… 07/25/07 Over 1518.09… S&P +0.5%
05/08/07 Under 1507.72… 06/11/07 Over 1509.12…S&P +0.1%
04/26/07 Under 1494.25… 05/01/07 Over 1486.30…S&P -0.5%
01/12/07 Under 1430.73… 01/26/07 Over 1422.18…S&P -0.6%
12/14/06 Under 1425.49… 01/09/07 Over 1412.11…S&P -0.9%
12/11/06 Under 1413.04… 12/13/06 Over 1413.21…S&P +0.0%
11/17/06 Under 1401.20… 12/04/06 Over 1409.12…S&P +0.6%
10/23/06 Under 1377.02… 10/26/06 Over 1389.08…S&P +0.9%
05/10/06 Under 1322.85… 05/12/06 Over 1291.24…S&P -2.4%
05/05/06 Under 1325.76… 05/09/06 Over 1325.14…S&P -0.1%
04/04/06 Under 1305.93… 05/03/06 Over 1307.85…S&P +0.2%
02/21/06 Under 1283.03… 03/07/06 Over 1275.88…S&P -0.6%
01/05/06 Under 1273.48… 02/07/06 Over 1254.78…S&P -1.5%
11/21/05 Under 1254.85… 12/30/05 Over 1248.29…S&P -0.5%
11/03/05 Under 1219.94… 11/17/05 Over 1242.80…S&P +1.9% (*)
09/28/05 Under 1216.89… 10/10/05 Over 1187.33…S&P -2.4%
09/19/05 Under 1231.02… 09/21/05 Over 1210.20…S&P -1.7%
09/12/05 Under 1240.56… 09/13/05 Over 1231.20…S&P -0.8%
08/23/05 Under 1217.59… 08/24/05 Over 1209.59…S&P -0.7%
05/23/05 Under 1193.86… 08/04/05 Over 1235.86…S&P +3.5% (*)
02/28/05 Under 1203.60… 03/02/05 Over 1210.08…S&P +0.5%
02/02/05 Under 1193.19… 02/18/05 Over 1201.59…S&P +0.7%
12/14/04 Under 1203.38… 01/07/05 Over 1186.19…S&P -1.4%
11/08/04 Under 1164.89… 12/09/04 Over 1189.24…S&P +2.1% (*)
07/30/04 Under 1101.72… 08/02/04 Over 1106.62…S&P +0.4%
06/28/04 Under 1133.52… 06/30/04 Over 1140.75…S&P +0.6%
04/27/04 Under 1138.15… 04/29/04 Over 1113.88…S&P -2.1%
04/15/04 Under 1128.84… 04/16/04 Over 1134.57…S&P +0.5%
04/07/04 Under 1140.51… 04/13/04 Over 1129.42…S&P -1.0%
03/02/04 Under 1149.10… 03/09/04 Over 1140.57…S&P -0.7%
02/12/04 Under 1152.11… 02/27/04 Over 1144.94…S&P -0.6%
12/16/03 Under 1075.13… 02/02/04 Over 1135.26…S&P +5.6% (*)
11/28/03 Under 1058.20… 12/10/03 Over 1059.05…S&P +0.1%
10/14/03 Under 1049.48… 10/27/03 Over 1031.13…S&P -1.7%
09/17/03 Under 1025.97… 09/22/03 Over 1022.79…S&P -0.3%
08/19/03 Under 1002.33… 08/27/03 Over 996.79…S&P -0.6%
06/17/03 Under 1011.68… 06/30/03 Over 974.50…S&P -3.7%
06/05/03 Under 990.14… 06/10/03 Over 984.84…S&P -0.5%
03/21/03 Under 895.89… 03/25/03 Over 874.74…S&P -2.4%
01/14/03 Under 931.66… 01/15/03 Over 918.22…S&P -1.4%
01/06/03 Under 929.01… 01/08/03 Over 909.93…S&P -2.1%
Out of 49 occurrences, 32 led to a lower S&P by the time the moving average rose back over .60 for a solid 65% accuracy. In the same period of time, the random chance for a lower S&P ten trading days later (the average length of the signal) is only 42%, indicating heightened equity call volume presents a significant downside edge over the intermediate-term. Only 4 cases led to an S&P up 1% or more by the time the signal was closed out, while 19 led to an S&P down 1% or more.
Equity Put/Call Ratio Triggers a Sell
By Rennie on Monday, June 7th, 2010 at 9:05 pmMajor averages fell more than 1% Monday, not quite hitting the 2% threshold noted in this weekend’s column that would have triggered the ‘crash alert’ signal. If we loosen the requirements of the crash signal discussed Sunday and only look for a 1%+ selloff after a 3%+ down day, we find a little more than twice the number of occurrences. Over 62 cases since 1900, 41 led to a subsequently lower Dow close within the next three days. That 66% win rate is well below the 88% accuracy utilizing the 3%/2% combination and provides no edge over random. However, 34 out of 62 occurrences (55%) did lead to a 3%+ down day within the next five sessions. Those are still high odds considering the random chance for such a steep selloff is virtually nil. So while we might bounce short-term, it’s too soon to say we’re out of the woods.
The S&P500 (cash) posted its second consecutive session below the ‘flash crash’ low from May 6th. That level was defended pretty aggressively on the first and second tests, but not so much this time around. TICKscore closed at -49 as institutions remained better sellers, sending the Cumulative TICKscore line down near its May low. NYSE breadth closed nearly 3:1 negative, sending the Cumulative Breadth line below its May lows.
The 10-day moving average of the CBOE equity put/call ratio crossed back under the .60 level on Monday, a bearish indication for the intermediate-term. This usually occurs as the market is rallying, so it could be a sign of just how weak the market is that the S&P is lower now than when the 10-day average peaked back on May 26th. In the table below I’ve extracted every instance since 2003 in which the 10-day average of the equity put/call ratio closed below .60 (date on the left), followed by the date when the average rose back over .60 and the performance of the S&P500 in this time frame…
CBOE Equity Put/Call Ratio 10day Avg & the .60 Level
06/07/10 Under 1050.47… ??/??/?? Over
03/10/10 Under 1145.61… 05/07/10 Over 1110.88… S&P -3.0%
01/04/10 Under 1132.99… 01/22/10 Over 1091.76… S&P -3.6%
11/16/09 Under 1109.30… 11/20/09 Over 1091.38… S&P -1.6%
10/14/09 Under 1092.02… 10/28/09 Over 1042.63… S&P -4.5%
09/16/09 Under 1068.76… 09/30/09 Over 1057.08… S&P -1.1%
08/20/09 Under 1007.37… 09/04/09 Over 1016.40… S&P +0.9%
08/07/09 Under 1010.48… 08/19/09 Over 996.46… S&P -1.4%
10/09/07 Under 1565.15… 10/19/07 Over 1500.63… S&P -4.1%
07/10/07 Under 1510.12… 07/25/07 Over 1518.09… S&P +0.5%
05/08/07 Under 1507.72… 06/11/07 Over 1509.12…S&P +0.1%
04/26/07 Under 1494.25… 05/01/07 Over 1486.30…S&P -0.5%
01/12/07 Under 1430.73… 01/26/07 Over 1422.18…S&P -0.6%
12/14/06 Under 1425.49… 01/09/07 Over 1412.11…S&P -0.9%
12/11/06 Under 1413.04… 12/13/06 Over 1413.21…S&P +0.0%
11/17/06 Under 1401.20… 12/04/06 Over 1409.12…S&P +0.6%
10/23/06 Under 1377.02… 10/26/06 Over 1389.08…S&P +0.9%
05/10/06 Under 1322.85… 05/12/06 Over 1291.24…S&P -2.4%
05/05/06 Under 1325.76… 05/09/06 Over 1325.14…S&P -0.1%
04/04/06 Under 1305.93… 05/03/06 Over 1307.85…S&P +0.2%
02/21/06 Under 1283.03… 03/07/06 Over 1275.88…S&P -0.6%
01/05/06 Under 1273.48… 02/07/06 Over 1254.78…S&P -1.5%
11/21/05 Under 1254.85… 12/30/05 Over 1248.29…S&P -0.5%
11/03/05 Under 1219.94… 11/17/05 Over 1242.80…S&P +1.9% (*)
09/28/05 Under 1216.89… 10/10/05 Over 1187.33…S&P -2.4%
09/19/05 Under 1231.02… 09/21/05 Over 1210.20…S&P -1.7%
09/12/05 Under 1240.56… 09/13/05 Over 1231.20…S&P -0.8%
08/23/05 Under 1217.59… 08/24/05 Over 1209.59…S&P -0.7%
05/23/05 Under 1193.86… 08/04/05 Over 1235.86…S&P +3.5% (*)
02/28/05 Under 1203.60… 03/02/05 Over 1210.08…S&P +0.5%
02/02/05 Under 1193.19… 02/18/05 Over 1201.59…S&P +0.7%
12/14/04 Under 1203.38… 01/07/05 Over 1186.19…S&P -1.4%
11/08/04 Under 1164.89… 12/09/04 Over 1189.24…S&P +2.1% (*)
07/30/04 Under 1101.72… 08/02/04 Over 1106.62…S&P +0.4%
06/28/04 Under 1133.52… 06/30/04 Over 1140.75…S&P +0.6%
04/27/04 Under 1138.15… 04/29/04 Over 1113.88…S&P -2.1%
04/15/04 Under 1128.84… 04/16/04 Over 1134.57…S&P +0.5%
04/07/04 Under 1140.51… 04/13/04 Over 1129.42…S&P -1.0%
03/02/04 Under 1149.10… 03/09/04 Over 1140.57…S&P -0.7%
02/12/04 Under 1152.11… 02/27/04 Over 1144.94…S&P -0.6%
12/16/03 Under 1075.13… 02/02/04 Over 1135.26…S&P +5.6% (*)
11/28/03 Under 1058.20… 12/10/03 Over 1059.05…S&P +0.1%
10/14/03 Under 1049.48… 10/27/03 Over 1031.13…S&P -1.7%
09/17/03 Under 1025.97… 09/22/03 Over 1022.79…S&P -0.3%
08/19/03 Under 1002.33… 08/27/03 Over 996.79…S&P -0.6%
06/17/03 Under 1011.68… 06/30/03 Over 974.50…S&P -3.7%
06/05/03 Under 990.14… 06/10/03 Over 984.84…S&P -0.5%
03/21/03 Under 895.89… 03/25/03 Over 874.74…S&P -2.4%
01/14/03 Under 931.66… 01/15/03 Over 918.22…S&P -1.4%
01/06/03 Under 929.01… 01/08/03 Over 909.93…S&P -2.1%
Out of 49 occurrences, 32 led to a lower S&P by the time the moving average rose back over .60 for a solid 65% accuracy. In the same period of time, the random chance for a lower S&P ten trading days later (the average length of the signal) is only 42%, indicating heightened equity call volume presents a significant downside edge over the intermediate-term. Only 4 cases led to an S&P up 1% or more by the time the signal was closed out, while 19 led to an S&P down 1% or more.