One sell signal to rule them all.

You know the one: the 5-day trailing average equity put:call ratio:

Retail options players almost never get significantly more complacent than this, and they virtually ALWAYS get creamed within a week or two, sometimes a little, sometimes a lot. If you did nothing in the market but buy puts or vol when the 5-day CPCE got under 2 standard deviations from its mean and sell or tighten your stop (use a conditional stop with options) when it reached 1SD you’d have a very nice trading career.

Couple this with the classic RSI signal from Friday, and I’d place the odds of a 2% further rise here at under 10%, and the odds of a 5% decline at over 80%. To be very conservative, wait a couple of days to confirm that the rise is broken, and use a stop against the highs, but I bet stocks stall here for no more than a week then fall hard. Maybe this is Oct 2007 redux. Sure smells like a big top circus. The latest EWI publication points out that the AAII survey is again at record lows — this is not as precise a timing indicator as 5-day CPCE, but it puts it in perspective: we’re looking for a major top, so any minor top like this could be the one.

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One thought on “One sell signal to rule them all.

  1. This is just unspeakably bearish.

    It’s what you’d expect to see if the S&P was going back down to its March 2009 lows over the course of the next year.

    If there has never been a lower P/C ratio during the last three years, then I assume this is at an *all time* extreme.

    Like the VIX at the beginning of 2007! What an opportunity!

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