Several weeks ago in Checking for Atheists, I talked about how bullish moves can be fueled by a large supply of non-believers who prefer to cling to a wall of worry in times of great uncertainty. These investors often prefer to wait until a bullish move is well established before they cautiously and reluctantly begin to resume long positions.
Volatility indicators, such as the VIX, usually provide an insight into just how worried these investors are, but put to call ratios do us one better: they give us a sense of their numbers. Right now, the numbers are compelling. As I noted in my weekly VIX recap, the ISEE data reflect all-time record lows of new call positions initiated relative to new put positions on the International Securities Exchange (ISE) over the past 20 days – a trend that has carried over to today’s session.
The other important put to call ratio that I follow closely is the CBOE’s equity put to call ratio ($CPCE on StockCharts.com), a chart of which I have included below. Like the ISEE, the CPCE is showing historically high level of puts to calls – in numbers not seen since early 2005. In the chart below, note that P/C readings of 0.70 or higher have consistently been good buying opportunities and today’s 10 day EMA of 0.73 has not been surpassed since May 2005.
Several readers have asked about the significance of a divergence between volatility and put to call readings. As I discussed last May in More Thoughts on the PCVXO, divergences in which volatility readings are much higher than put to call numbers are usually bullish, while the current situation, with put to call numbers much higher than volatility data, tend to resolve in a bearish move going forward.