It’s been a stunning display of bullishness as markets blasted off from the March lows and kept rising. Have we reached a level that might be described as excessively optimistic? Here are 3 indicators to consider.
The put/call ratio is the first item on the “might be extreme” list. To put it in the simplest terms, more traders than usual have been buying calls and fewer than usual have been buying puts.
Since calls are profitable when prices rise, those who’ve purchased them are clearly bullish. Since puts are profitable when prices fall, those who’ve bought them are clearly bearish. It can get much more complicated than that, of course, but those are the basics.
The put/call ratio typically fluctuates within a measurable range. Every once in a while the ratio moves outside of that range. Right now is one of those times — hence, the word extreme applies.
The CBOE Total Put/Call Ratio weekly index looks like this:
In the more than 3 years shown on this chart, it’s never been quite this low. The put/call ratio has dropped lower than it was at the beginning of the year — before the massive February-to-March meltdown. Options traders are as bullish as they’ve been for months and months. So, extreme is the word that describes this kind of action.
The number of New York Stock Exchange stocks making new lows is another way of gauging bullish/bearish thinking. If many stocks are making new lows, it’s a sign that buyers are staying away and sellers have taken over. If few stocks are hitting new lows, that means buyers have stepped up.
The NYSE New 52-Week Lows weekly chart looks like this:
In the time period — going back to late 2016/early 2017 — it’s never been as low as this. Similar to the put/call ratio, this chart is also scraping the bottom. Fewer new 52-week lows than in the past 3 years. That’s how confident stock buyers have become as markets rise dramatically off the mid-March lows. It’s hard to think of this as less than extreme.
Just for good measure, here’s a third one: a new all-time high in a key index of the number of advancing stocks versus the number of declining stocks.
The New York Stock Exchange advance/decline issues, weekly chart, looks like this:
It’s backed off just a bit from last week’s peak up above that 2250 level, but it counts as recent higher high. The look of this tends to confirm what can be seen in the previous 2 measures. Buyers of stocks seem to be unafraid of the “just keep buying” frenzy.
These are extreme readings indicating excessively bullish sentiment but here’s the catch: this doesn’t mean a sudden dramatic sell-off is the next event. Stock buying can continue to be extreme and sometimes it goes on for much longer than anyone might expect.
Nonetheless, these 3 measures are making a statement.
