Short-term Outlook (1-5 Days):  15% Long (from 9/23 at 112.65)

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Equity Indicators - Updates and Extremes

Small Options Traders

We haven't looked at the behavior of small options traders for awhile, mainly because they haven't been doing much.

One clear sign from the weekly data, however, has been that even with a market that has shown decent signs of recovery from its depths a few months ago, these individual traders are not all that enthusiastic about it.

In the months leading up to the market peak in April, we saw these traders becoming more and more aggressively bullish as stocks rallied, pretty much following the market up.

During the May/June correction, they quickly became very scared, and bought a notable amount protection via put options, with our ROBO Put/Call Ratio spiking to its most-extreme level since November 2008.  Even with a sizable recovery in stocks since then, the ROBO Ratio shows some modest trepidation, and hasn't even given a higher high than what we saw during the last rally into early August.

When the S&P peaked at 1114 in early August, these traders were spending 34% of their options volume on buying speculative call options.  Last week, with the S&P knocking at 1150, they spent only 30% of their volume on calls.

The table below shows S&P 500 performance going forward when the index has rallied 5% or more during the past five weeks, split out between times when the ROBO Ratio was equal to the current level or showing even more skepticism, and those times when it showed less.

The edge wasn't great, but generally we did see the market out-perform when we were seeing this much or more skepticism in the ROBO Ratio, especially the longer-out we look.

In order for prices to rise, we do need traders and investors to become more bullish, not less, so in general we do want to see increasing bullishness...just not to an extreme level.  Last week, we discussed the idea that it's tough to find many indicators suggesting extreme optimism, and this is one more example.  When even small options traders don't get excited about a 10%+ rally, you know that there's a significant amount of skepticism out there.

On a side note:  One of the most-requested features we've received is the ability to have crosshairs on the charts, so you can more easily line up extremes in the various indicators with where the market was at the time.

I've programmed an example for an obscure chart and got it to work properly on most major browsers.  Before rolling it out on all the charts, I'd like some of you to try it and enable the Crosshair function (at the bottom of the page) to see if it works for you, or if you get any errors.  If you do get an error, please post a comment with the error and what browser you're using.

Click here for the chart

At the bottom of the page, just click the box next to "Turn On Crosshair" and then press the button.  To turn it off, just refresh the page.

Thanks a bunch.

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