Tuesday, March 23, 2010

Exuberance + Waning Momentum = Caution

The chart below indicates the Equity CALL-PUT 10 and 50 day ratios calculated by the ISE The most recent levels indicate that the 10 day moving average of call buyers are twice the purchases of Puts. Although this level has been seen several times in the last few months it is indicative of slightly over exuberant bullish sentiment.
The term chart below shows the SPX and the 10 day moving average of the ISE EQUITY PUT-CALL RATIO. (note the inversion as compared to the CBOE ratio). Once again market sentiment as determined by options trading is at elevated levels--suggesting an over commitment by speculators to the bullish camp.
Both the above indicators are not to be viewed as pinpoint market timing tools but merely an indication of the general sentiment amongst speculators. With that being said, when option sentiment is at these levels it is historically a indication that caution should be used when considering the short term upside potential of market prices. (i.e. risk-reward sucks)

Another indication that the market is getting ahead of itself in terms of valuation is the ratio adjusted McClellan Oscillator (using Nasdaq A-D Data). In recent days the number of new highs being made on the NASDAQ has diminished appreciably, suggesting underlying weakness and waning momentum in the incredible rally from both, March of 2009, and from the short term low of February 5th 2010. As with the option data: This activity warrants caution if one is long the markets.

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