Over the last few weeks the CBOE Equity Volume Put/Call ratio's 10 and 20 day moving averages have chopped around, crisscrossing one another. The initial cross last month on May 21st was the first sign that option investors were questioning their bullish stance. However, option investors questioned their timing with each day the markets moved higher and therefore repositioned for another bullish move higher. If you have been a reader for a while you know that the last three weeks of consolidation is not normal for this indicator. Usually, option trader sentiment ebbs and flows from bullish to bearish signals often with variations in amplitude. Normally, bullish or positive bias signals are established when the Put/Call ratio's 10 day moving average peaks above 0.80. In extreme cases like we saw last year and earlier this year, the 10 day moving average peaks above 0.90. Bearish or Negative bias signals are usually initiated when the Put/Call ratio's 10 day moving average dips below 0.65. We like to see the 10 day moving average curl up for two days prior to issuing a new signal. A crisscross of the 10 and 20 day moving averages helps provide confirmation of the signal.
As mentioned above the Put/Call ratio's 10 DMA has been hovering near the 0.60 level with a uncharacteristically shallow move higher over the past month. This move higher confirms the negative bias signal given two weeks ago. Also confirming the signal's bias is the crisscross that occurred on June 8th. As of Wednesday's close the 10 DMA was at 0.684 and the 20 DMA was at 0.663. The Put/Call ratio is on a Negative bias signal. SIGNAL: NEGATIVE BIAS Volatility Index Indicator Over the last few months there have been a couple of false Negative signals that strangely occurred at the end of each month. To review signals are usually given when 10 day moving average (dma) of the CBOE Volatility Index (VIX) reverses course from its previous trend for two consecutive days. The first day of a reversal of the 10 dma signals a neutral bias. As with the Put/Call ratio, the 10 dma crossing above or below the 20 dma provides signal confirmation. An uptrending VIX 10 dma signals a Bearish or Negative bias while a declining VIX 10 dma signals a Bullish bias. Increasing volatility following a steady decline suggests that portfolio managers are beginning to buy puts for portfolio protection rather than selling calls. The increase in premium could also result from option investors buying relatively cheaper calls an equity replacement strategy to gain more leverage. Equity replacement often occurs when the risk free rate increases and volatility has decreased from its mean. For instance, last week's Treasury auctions provided investors with an opportunity to buy the ten year treasury with a nearly 4% yield. Rather than buying shares to represent an S&P allocation, a portfolio manager could buy S&P options for a fraction of the cost while maintaining a defined risk position and invest the remaining assets in treasuries. But this goes way too deep into why the VIX moves higher. All we need to know is that the reasons it goes higher suggests a good opportunity to lighten our long biased portfolios and/or go short the market.
As of Wednesday's close, the VIX closed down to 31.54 from 32.68. On Monday the VIX gapped higher as a result of the gap lower in the markets. This move higher closed above the VIX's 20 dma and caused the 10 dma to curl up. Following Tuesday's continued selloff the VIX climbed higher and so did the 10 dma. As of Wednesday nights close, the 10 DMA ticked up for the third day confirming a Negative bias. The VIX's 10 dma closed at 29.76 and the 20 dma closed at 30.36. Further confirmation for the signal changing to Negative will occur once the 10 dma closes above the 20 dma. SIGNAL: NEGATIVE BIAS Investors Intelligence Polls To review, the traditional method of determining the Investor's Intelligence indicator signals is done by viewing the bullish percentage level. The widely followed Bearish indication level is when the Bullish percentage breaks above 55%. Bullish indications are traditionally determined when the Bearish percent breaks above 45%. There is a built in skew because there are generally more bullish investment newsletter writers than bearish ones simply because investors subscribing are looking for someone's advice on positive market/economic points rather than the negatives or both. For instance, Mad Money's Jim Cramer commonly states that there is a bull market someplace. Many writers and advisers have an easier time looking for the positives rather than both positive and negative trade setups. The reason is if you pick multiple markets or sectors direction, you can be wrong multiple times rather than once. It is sort of a way to diversify one's opinion or hedge oneself.
Following a nearly clear shot upward from the March lows, the Bullish percentage of investment advisers increased to 47.7 last week from its March 11th low of 26.40. The dashed purple line displays the Bullish polls which illustrates a tick downward this week. The Bearish poll, illustrated by the blue dashed line, ticked upward. The results of the poll are 44.8% bullish and 26.4% bearish. The spread between the two polls ticked down to 18.4% following a clear reversal in investment newsletter writer's sentiment. Since both polls reversed and the spread declinedm, the signal for the Investor's Intelligence indicator is now on a Negative bias. SIGNAL: NEGATIVE BIAS SUMMARY: The overall bias is NEGATIVE with all three indicators on negative signals. It is rare to have all three indicators pointing in the same direction. Usually we are neutrally positioned with a bullish or bearish skew. Robert J. Ogilvie
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