Wednesday, February 08, 2006

Put/Call Ratio: Does It Make A Difference?

I noticed that we continue to have a relatively high equity put/call ratio despite Wednesday's rise. The five-day put-call ratio is the highest we've seen in 2006. To see if the ratio makes a difference, I looked at all days since March, 2003 (N = 737) in which SPY was up over .5% and the one-day put/call ratio was over .75.

Overall, we've had 191 days in which SPY was up over .5%. When the put/call ratio was over .75 (N = 37), the market three days later was up by an average .51% (24 up, 13 down). When the put/call ratio was below .75, however, the market three days later was up by a subnormal .03% (86 up, 68 down). It appears that rises have a better chance of continuing to the upside in the short run when sentiment remains bearish, as is the case at present.

I will continue to investigate the equity put/call ratio and report results here and on my personal site. Note that this is the ratio for stocks only, eliminating the hedging bias from options transactions on indices.