Something weird happened in the options market on Wednesday…
The stock market opened higher that morning. The S&P 500 gained more than 20 points in the first few minutes of trading. And, it held on to those gains throughout the rest of the session.
Normally, that sort of bullish action inspires traders to buy call options – options that increase in value when stocks go up. But, that’s not what happened on Wednesday. Instead, trades were loading up on put options – BIG TIME.
Look at this chart of the CBOE Put/Call ratio (CPC)…
The CPC is a short-term, contrary indicator. It compares the action in call options to the action in put options. A reading above 1.20 shows extreme bearishness among speculators and can indicate a good time to buy stocks for the short term. A reading below 0.80 shows extreme bullishness and could indicate a good time to sell.
The CPC closed at 1.28 on Wednesday – the highest level of 2019, as the S&P 500 screamed higher.
In other words, investors became more bearish as stocks rallied. From a contrarian perspective, this is a short-term bullish sign.
This is the fourth time the CPC closed above 1.20 over the past five weeks. The previous three occurrences led to quick bounces in the stock market within two days. If that pattern continues, then stocks should be higher a few days from now than where they are today.
Admittedly, it’s not easy to be buying stocks right now with all the erratic moves happening in the stock market. But, extreme readings in the Put/Call ratio have generated plenty of profitable short-term trading signals so far this year. Wednesday’s reading of 1.28 indicates the most extreme level of put buying (relative to call buying) we’ve seen in 2019.
And, with the broad stock market on the verge of another large move, it sure seems to me like stocks are more likely to be higher than lower in the days ahead.
Best regards and good trading,