But What Do Options Say About Animal Spirits?
There's a lot to fret over, but it's likely we rally following a pullback.
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Let’s talk about the options ratios. Let’s talk about them because I see much fussing over them in the past few days.
They are low. They have been low. They never even got high when everyone got so bearish a week or so ago. Well, actually, on January 16th, the equity put/call ratio zipped right up to .94, so we did get a high reading, but aside from that day, we’ve been trading under .60 for more than a week.
But let’s look at the equity put/call ratio first using a five-day moving average. It has not yet plunged to the low 50s, although I expect it will do so in the next several days. But we are currently not where we were for much of October, November, and December. My point is that it has been low for months now but is currently higher.
The ten-day moving average is also off the lows that it has sat at for the last few months. In fact, if this was a stock chart, you might say it is bottoming. But is it extreme? Not yet, it isn’t.
We have talked about a lot about the ISE call/put ratio. It was extreme in early January when the 21-day moving average got over 1.70. It’s not exactly showing any fear right now, but it is now back at 1.60, so it has come off the boil.
My point is that I keep hearing about ‘animal spirits,’ but the data shows folks were loaded up on more equity calls a month ago than they are now. If I am correct that the market should dip and rally again, then I expect the equity put/call ratio moving average lines will be low as we head into early February.
In terms of the surveys, we saw the Investors Intelligence bulls tick up two points while the bears ticked down two points. Not much movement there.
If you want to fret over the current state of the market, then I can give you a list. You can fret that the Utes, right after I applauded their move up, gave it all back and more. You can fret that the number of stocks making new highs is nowhere close to where it was the last time the S&P was at 6100.
If you want to fret, then fret that the VIX is too low or that breadth was kind of sour on Wednesday. Or that the SOX has now been green for six straight days and hasn’t gone to seven in more than a year, so it’s highly likely we get a red day for the semis Thursday or Friday. Heck, you can even fret that for all the bank love, the Bank Index hasn’t made a higher high yet.
I have a lot to fret over, but when my intermediate-term indicators are not yet overbought, I am inclined to think we should get a pullback and rally again. That is typically what sucks the skeptics back in. And maybe that’s when the equity put/call ratio’s moving average lines get back to the bottom of the page.
