Short-term Outlook:  25% Bearish  As of Jan 12, 1134 SPX

Equity Indicators - Updates and Extremes

OEX Put/Call Ratio and OEX Determination Index

We often have some disagreement among our various indicators; it's very rare to see everything in agreement at the same time.  But it's very unusual to see indicators within the same general grouping diverge from one another.

We have that now with the OEX Put/Call Ratio and the OEX Determination Index.  Recall that the put/call ratio simply looks at the volume of trades in S&P 100 (OEX) put options and divides it by the volume in call options.  The more put volume relative to calls, the more bearish OEX traders are (in general).

The Determination Index brings open interest into the equation to see how aggressive they are in opening new put or call contracts.  The more aggressive they are in opening new put positions, the more bearish they are. 

Right now, we have the Put/Call Ratio stretched outside of its upper trading band, but the Determination Index is below is lower trading band.  It's rare to see them at an opposite extreme at the same time.

This is so odd that it's only happened three other times in the past decade.  Those were May 11, 1999, April 3, 2001 and May 4, 2006.

The occurrences in 1999 and 2006 led to a couple of days of upside, then a meaningful correction in equities.  The 2001 instance marked the bottom of an intermediate-term decline.  Two tops, one bottom.

It's difficult to reconcile that, but one difference between the three occurrences is that in 1999 and 2006 (as now), open interest was well above 1.0 (meaning more open puts than calls).  But in 2001, when the market was bottoming, it was at 0.9 (meaning more open calls than puts).

So although traders weren't showing a lot of desire to open new contracts in 1999 and 2006, the fact was that they were opening new contracts, just not at a really rapid clip.  In 2001, even though put volume was relatively high, that volume wasn't going to open new contracts, while the call volume was - a bullish sign.

Our current circumstance is much more similar to the 1999 and 2006 occurrences than 2001, so the takeaway would be that the current divergence between the Put/Call Ratio and Determination Index may be more bearish than anything.  But with only two precedents, it's a stretch to weight any conclusion too heavily.

On A Side Note...

I'll be doing a free webinar after the close today (6pm EST) with Fari Hamzei of Hamzei Analytics.  We'll mostly touch on the topics covered here over the past couple of weeks, and answer some questions at the end.

Click here to register...oh, and please forgive the picture.