VIX & Put:Call starting to make puts attractive again

A fair degree of complacency has snuck back into markets over the last month.  We don’t have a strong sell signal in stocks yet, but if April marked the high in US and European markets and economic indicators are turning down again, this could be a good spot to start building short positions again:


Here’s the equity put:call vs the 20 day moving average, back to one standard deviation under its mean. Dipping lower would require the kind of extreme complacency that we’ve only seen twice in the last decade, so I wouldn’t count on it:


The dollar has also corrected its overbought condition (and is actually very oversold), which is key for a resumption of the deflation trade:

Complacency still extreme

Even if this is just a small correction in a continuing rally (which it is very dangerous to assume), the market has a lot of room left to shake things up. The 20-day average equity put call ratio is still at an extremely suppressed level:

Here is the raw data since 2004, the last time we saw such a low running average of CPCE. Stocks went nowhere for about a year after that. They should be so lucky this time…

Such long-running lows must be balanced out with more than a bit of fear. One other thing that is noteable in this chart is how the Panic of ’08 only produced marginally higher put:call readings than the stagnation of ’04.

Still 2007

Yahoo! Finance

I can’t draw on this chart, but you can clearly see the similarities in price, RSI and MACD between the last 6 months and the period leading up to final top of the even bigger bear market rally of 2003-2007. Will we levitate up here for a year like we did back then? I doubt it, since this is a smaller degree wave and the time scale is more compressed. It appears to be running out of steam after 12 months, not 4 years.

Since summer, the bears have been demoralized by time, not price — we’re only 1000 pts higher than last August. The bullish complacency and dejected state of the bear camp is what you need for a final top.

RSI and put:call signals like we have right now are what you need for a smaller-degree top. One of these smaller degree tops will turn out to be the big top. This is not the time to give up on shorting.

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.

Party like it’s July ’07

I have been watching the parallels between the last few months and the first half of 2007, and they are still very close. The late June – early July 2009 drop lines up with the late Feb – early March 2007 correction. In each instance, the markets then ramped up, then zig-zagged higher still as the put:call ratio oscillated at a low level. The final euphoric highs of July ’07 (when Chuck Prince said he was “still dancing” and Paulson said he had never seen such strength in the global economy) were marked by a brief lower low in CPC, which further compressed the springs for a stunning spike in fear as the equity markets cracked and Cramer threw a fit.

The crack here is likely to be even more violent, since everyone knows deep down just how bad things really are in the economy. It won’t take more than a shift in psychology to get people focused on the problems again, which are now fully developed, not just vague fears of some temporary “liquidity” issue in obscure debt instruments.


The CPC does not linger at under 0.55.  Caution is creeping in already, as yesterday CPC made a higher print and the VIX, Russell and Nasdaq failed to confirm the Dow’s new high. The commodities complex may also be stalled out, and the dollar has corrected enough to continue far higher than in December. This time, the stars are aligned for an “all the same markets” rush to safety. Even Treasury bonds have sold off enough to rally nicely:

Source: Yahoo! Finance