The single best short-term market timing indicator just flashed a “sell” signal.
We look for extreme conditions in the CBOE Put/Call ratio (CPC) to give us an idea of where the broad stock market might be headed over the next few days.
And, so far this year, the CPC has been 100% accurate as a contrary indicator.
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 0.78 last Thursday. Traders were buying far more call options than put options. And, from a contrarian perspective, that should lead to weakness in stocks in the days ahead.
Take a look at this chart of the CPC…
The blue arrows on the chart point to times over the past few months when the CPC dipped below 0.80 and generated a sell signal. The red arrows point to when the indicator jumped above 1.20 and triggered a buy signal.
Here’s how those signals played out on the S&P 500…
In every single case, buying the S&P 500 when the CPC popped above 1.20 and shorting S&P 500 when the CPC dipped below 0.80 was a profitable trade.
I don’t know of any other indicator that has been so remarkably accurate this year. And, I don’t know if this indicator will continue its winning streak. But, this new CPC sell signal is enough to keep me cautious going into this week.
This isn’t a long-term signal, of course. So, we’re not using it to figure out where the stock market will be several weeks or several months from now. Trader sentiment is far too fickle to provide long-term insight.
We’re just looking out several days. And, based on the “sell” signal that triggered at the close of trading last Thursday, the setup looks bearish for this week.
Best regards and good trading,
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