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Thursday, October 3, 2002  8:45 PM EST

The equity and total put/call ratios continue to remain rather elevated, with the total p/c ratio reaching 1.04.  This is the 19th reading over 1.0 since the beginning of the year.  This compares to 34 readings over 1.0 in the entire prior 7 years.  The histogram below shows total put/call readings in the bull market leading up to March 2000 compared to readings after that point.  The total put/call ratio is on the horizontal axis while the percentage of time we reached each interval is on the vertical.  So, for example, during the bull market we recorded readings between 0.50 - 0.60 about 10% of the time.

We can see that there is a consistent bias towards lower put/call readings in the bull market versus the bear market.  To put things into better context, today's reading of 1.04 is 29% above the 200-day moving average.  Two years ago, it would have taken a reading of only 0.65 to reach the same deviation.  Over the past seven years, we have seen deviations (of the p/c ratio from its 200-day moving average) of up to 90%.  It would take a deviation of over 40% just to reach the 95th percentile, and 65% to reach the 99th percentile.  So if we are looking for extreme put/call readings in our current environment, we need to begin looking for readings of at least 1.13 and preferably ones over 1.34.  That means that in order to consider a total put/call reading truly significant, we will have to be looking for near-record readings.

Most of our short-term sentiment measures are now hovering around oversold, though ironically not as much as when I sent out the intraday update mid-day.  The little afternoon rally we had was enough to not only bring the STEM.MR model back to neutral, but also the push the cumulative TICK indicators up off their lows.

The positive seasonality I had been mentioning since the weekend is not only gone, but beginning to reverse.  As you can see from the Seasonality section of the site, the fourth day of a new month has been average at best and the fifth actually under-performs on average.

I had also mentioned the positive affects of the extremely oversold TRIN in the first three days after a reading over 1.60, such as we had entering the week.  Those affects are also now beginning to work against us, as after three days following such readings, the market has had a tendency to under-perform during this bear market.

One positive on the day was an extremely high SPX put/call bid/ask bias ratio.  Today's reading of over 13 is the highest I have ever recorded, and reverses the bearishly low reading we saw on Tuesday.  The main reason for such a high bias reading today was the apparent sale of approximately 10,000 put options in the December series coupled with the apparent purchase of about 10,000 call contracts.  The puts were spread out across strikes just under the market while the calls were just above the market.  As I always say, there's no way for us to know just from this information what the underlying strategy was, or even how many individual institutions were involved, but generally this type of activity is quite positive for the market in the short-term.

At this time, I really have no particular bias.  Monday's lows will be important, especially on the NDX.  If that level cannot hold, then I believe it will take much more extreme intermediate-term sentiment readings before I would suggest taking long-side trades, as it could get very ugly very quickly.  If we somehow rally from here, I would continue to focus on last Thursday's highs as the line in the sand.  I am not interested in the long side under that level for anything more than a day trade.

Wednesday, October 2, 2002  10:40 PM EST

From a sentiment perspective, there's not a whole lot to add to what I've already said over the past day, so I'll just mention a couple of updates:

I've been harping on the very overbought intraday cumulative TICK indicators recently, and again in the intraday note early this afternoon, because it is one of the most consistent edges I have found when we are in the midst of a defined trend.  Last Thursday and again today we saw that it is very difficult for the market to make additional headway, but swift declines are common.  The afternoon drop did a world of good for those indicators, as they have relieved the overbought condition and in fact have swung back close to or at oversold levels.

For those who are curious, the price oscillator that I mentioned yesterday is now back to neutral territory.

Seasonality and the positive short-term after-affects of the extremely oversold TRIN are now beginning to wane, and will be completely gone by tomorrow.

This afternoon the NYSE released a statement stating that a large error occurred on the sell side this afternoon, and that no doubt exacerbated whatever selling was in the process of happening naturally.  I believe this will cause ripple effects at least in the early hours of tomorrow's trading (along with the usual economic numbers), so caution is warranted, as games may be played more than normal. 

I've been saying that as long as we are under last week's highs, the best risk/reward trade for short-term traders likely lies with selling overbought sentiment instead of buying oversold sentiment, and I'm not seeing anything tonight that would change that expectation.  Since we're not even oversold yet, I see few reasons to expect a change in trend on any time frame.  If we have a large gap down opening tomorrow accompanied by a strong positive STEM.MR reading, then it may pay to try a scalp from the long side, but I would view any long trades at this point to be highly speculative.

Tuesday, October 1, 2002  10:20 PM EST

I've mentioned earlier today that if we have any more of a rally, we'll be in the same short-term position we were in Thursday.  Well, we did and we are.

The STEM.MR model is now extremely overbought with a reading of 5%, and the intraday cumulative TICK indicators are equally overbought.  These indicators are very effective when they give signals counter to the prevailing trend, as we have now.  We saw last week just how effective they can be.

In addition to the overbought situation, tonight we have the lowest (most bearish) S&P 500 put/call bid/ask bias ratio in the past three months.  Here is the breakdown:

Those back month (anything expiring in November and later) trades are the most aggressive I have seen since I began watching this data closely.  As always, there is no way for us to tell on this end what strategies are being employed with these trades, and in fact they could actually reflect bullish underlying positions.  But normally when we've seen these institutions aggressively selling calls and buying puts at the same time, it has lead to tradable declines within three days.  And over the past few months, I have NEVER seen something as clear-cut as only 2% of puts going off at or below bid but over 45% at or above ask, at the same time that 61% of calls went off at or below bid and only 12% at or above ask.  It did not appear to be just one institution in one strike or series, either, as it was spread very evenly among strikes, series and expirations.

I calculate a price oscillator each day that I use as a confirmation of what I am seeing on a sentiment front.  In fact, the oscillator itself is a reflection of sentiment, as it shows where we opened and closed in relation to the high and low within each 30-minute bar.  If we open at the bottom of a bar and close at the top, this oscillator will read 100%.  If we open at the top and close at the low, it will read zero.  I calculate it on a 30-minute time frame and then take a 13-period moving average to reflect the past one full day of trading.  When the moving average reaches an extreme, it shows that one group or the other has been very aggressive and a rest is normally warranted.  I was struck tonight by how much today's situation mirrored that of July 5th.

THEN...

AND NOW...

We can see that in both cases, we slightly undercut the previous swing low, then rallied hard right to resistance, with the price oscillator reaching well above 80%.  Of course, the July situation immediately resolved itself the same way the great majority of these conditions do - by resuming the major trend.

We still have favorable seasonality with us for the next two days, along with the short-term positives created by the oversold TRIN mentioned this weekend.  These factors, along with the rather positive intermediate-term sentiment picture, could carry this rally a bit further.  However, we are still in a very clear downtrend and sitting right at resistance points that thousands of very hungry short-sellers are looking at, with a whole lot of money earned over the past two years with which to ply their trade.  They've had a good ride of things and will not let it go easily, and that must be respected until we reach more extreme sentiment conditions.  So with us sitting at resistance and an extremely overbought short-term sentiment condition, I cannot think of a reason why I would want to be long right now, but can think of plenty why I would want to be short.  If we break last week's highs decisively and can hold above those levels, then I will be forced to change my bias from selling overbought short-term sentiment to buying oversold sentiment.  That may be the wrong posture to have, but I believe the odds are heavily in my favor.

Monday, September 30, 2002  9:06 PM EST

There really isn't much to go over tonight in addition to the weekly commentary from Sunday.  Obviously, we broke the support level I had talked about, and so as I said I would not be looking aggressively for longer-term long positions until we either clear last week's highs or reach much more extreme sentiment conditions.  Until one of those events happens, I believe the best risk/reward trades will consist of using overbought short-term sentiment as good entries for selling any longs and/or entering short positions.

The intraday cumulative TICK indicators, after cycling back up from oversold near the open this morning, are now quickly approaching overbought once again.  This is the same situation as Thursday (although not yet as extreme), where these indicators were becoming overbought within a defined downtrend - a high-odds opportunity to sell short once price begins to fail.

I mentioned on Sunday the relatively strong positive bias that the last day of the month and the first three days of a new month tend to exhibit.  I double-checked tonight to see if October had any unusually positive or negative deviation, but it did not.  It was still positive, but only on a par with the other months.

Recently, I stated that when the 10-day TRIN reaches 1.60 or above, the S&P has had an 80% probability of rising over the next three days, with an average return greater than 1.5%.  It is currently at 1.65.

From a longer-term horizon, price action is unacceptable and sentiment is not at a significant extreme.  That tells me to stay on the sidelines or trade with the trend.  From a short-term perspective, sentiment is mixed.  We have the intraday TICKs becoming overbought, STEM.MR neutral and the TRIN and seasonality bullish.  That also tells me to stay with a short bias but trade lightly and use tighter-than-normal initial and trailing stops for now.

- Jason Goepfert