Greatest near-term risk from my perspective is investor complacency in the face of an uneven and uncertain path for the economy.
Equity P/C ratio dropping below 50% suggests that is what's happening. pic.twitter.com/6MAhZMfAWB
— Willie Delwiche (@WillieDelwiche) May 21, 2020
Today’s Chart of the Day was shared on Twitter by Willie Delwiche (@WillieDelwiche). In blue is a 3-day moving average of the CBOE Equity Put/Call Ratio over the past five years, along with the S&P 500 in the upper pane. The Put/Call Ratio is a short-term sentiment indicator. Protective put buying pushes the ratio higher, signaling fear. On the other hand, speculative call buying pushes it lower, signaling optimism. Like most sentiment indicators, it’s best used as a contrarian indicator, especially at extremes. Willie points out that the Put/Call ratio has fallen below 50%. This essentially means that for every 100 calls bought, less than 50 puts were bought. This is the lowest reading since the S&P 500 peaked in mid-February. This development is raising concerns that market participants are overly optimistic and too complacent in the near-term. Unlike other sentiment gauges, the Put/Call Ratio is unique in that it measures what people are actually doing, rather than what they say they’re doing. As we know, there’s no such thing as a magic indicator that will work 100% of the time. However, this is one of many data points worth considering at the moment.