Some good stats here from this week’s Mike Santoli piece in Barrons:

“THE MARKET HAS COME A LONG WAY┬áin a little while. McMillan Analysis pointed out Friday that the Standard & Poor’s 500 was three standard deviations above its 20-day average, which tends to portend at least a short, sharp reversal.

The publicity-shy investment pro known here over the past couple of years as the “mystery broker” came into the year a nervous bull, long stocks but keeping the market on a short leash as he awaited confirmation from the tape to determine if it remained a bull market. Those criteria of cyclical, risky-stock leadership, mentioned above, have checked out, yet he’s tactically cautious.

For one thing, the ratio of the 15-day volume of bearish puts on the S&P 100 Index to bullish call volume hit 2-to-1 last week. Traders of these instruments, known as OEX options, are proven smart-money actors, so their caution should be heeded. In the past decade, this ratio hit this level only in February 2007, February 2011 and April 2011; it also nearly reached 2-to-1 in late October of last year.

Each instance foretold an imminent correction of some significance.

The fact that two of these episodes occurred early last year points to the similarity of that market and today’s, with lots of scary macro news being defied by a quietly levitating stock market. Of course, stocks are a bit less pricey versus earnings this year, and have endured pretty trials since then. But the notion that equities have gotten slightly ahead of themselves is as valid now as it was a year ago.

The mystery broker’s verdict: He doesn’t “see more than 2% to 3% upside before [a] correction.”

Source: Barrons


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. I collect the OEX put call data and I did the calculations Santoli said showed ratios greater than 2.0. I found none, and unless I am making an error(s), then what he suggests is wrong. If you are interested, provide me an email address and I’ll forward a copy of my note to him and the spreadsheet data and calculations.

  2. I looked up the “10-day average OEX put/call options ratio” on Google. Under “” there is a chart which shows a peak in early April, 2011 at a value of 2.1, a peak at about Nov. 1, 2011 of 1.85, and a peak days ago of 1.96. The chart did not go back past March 2011, but matches the information in Cullen’s post.

  3. McMillan Analaysis did not actually state that the S&P 500 was three standard deviations above its 20-day average at any point in the last three weeks.

  4. The picture here is not in doubt.

    SentimenTrader’s data goes back 14 years and calculates 5-,10- and 21-day put/call ratios. Readings over the past couple of weeks exceeded 2.3, 2.1 and 1.9 respectively. This puts them among the very highest put-call ratios recorded since 1997.

    The only two previous occasions when all three reached these levels were:

    April 2011 – (3% pullback then final rally to May 2 top)
    January 2000 – (10% correction, then final rally to March 24 top)

    Perhaps what makes the readings more noteworthy is that the OEX Open Interest ratio (taking into account all options contracts outstanding) has spiked to levels of put interest last seen only in July 2007 (12% correction, then rally to Oct top) and May 2011 (at the top).

    At extremes of sentiment OEX trader activity is a highly reliable non-contrary indicator. Combined with measures showing rising, though not yet blind, optimism among the ‘dumb-money’ troup – AAII, Investors’ Intelligence, CBOE Equity put-call etc. – we may well be in a similar position to three of the four examples noted above. This would imply a modest pullback or correction starting now, then a rally to the final top within one to three months.

    The one caveat? If we’re at the start of a new secular bull market as one or two shrewd players are claiming (though I don’t see it myself), none of the above will matter. How and whether the market corrects starting next week will be an important tell.

  5. One would hope that Santoli at Barron’s puts forth correct reportage. I hope someway my data are incorrect and he is correct in what he wrote and then ended being disseminated here. But if he or his source is wrong, it detracts from his credibility.

    Any of these indicators can fail, but if anyone is to reference them, then hopefully the data we use for calculations will be correct; otherwise it is a total waste of words.