It is common these days for technical indicators to misfire. Amidst this, the CBOE equity-only put-to-call ratio is acting strange; if past is prelude, it is signaling a massive rally in US equities, but at a time when distortions prevail, it is hard to conclude if it is a signal or noise.

It is rare for the CBOE equity-only put-to-call ratio to register one-or-higher readings. Going back to October 2003, there have been 55 instances in which the ratio was one or higher. That is out of 4,834 sessions! The phenomenon is rare. Plain and simple.

At any given time, put-to-call ratios can help determine investor mood through options. It is a contrarian indicator. When either calls or puts are excessively accumulated, things tend to go the other way as they are unwound.

A ratio of one means puts are at least as much in demand as are calls. This happens when the investing mood is somber. This is evident in Chart 1 which shows the performance of the S&P 500 when the ratio is one or higher.

Out of the aforementioned 55 sessions, the large cap index rallied in 14, five of which occurred since last November (box), which again speaks of the distorted nature of the way markets are trading these days.

If the signal coming out of the ratio is not distorted, rather genuine, then a massive rally awaits US stocks.

Chart 2 calculates a 21-day moving average of the ratio, and it is off the charts. In November and December, there were 12 sessions in which the ratio came in one or higher. This has helped push up the 21-day average – to an extent it is at an all-time high. As a matter of fact, the average has exceeded one for six consecutive sessions through Thursday – and in 0.90s in four sessions before that. This is panic territory – beyond panic.

For reference, on March 20, 2020, when there was utter panic post-Covid breakout, the 21-day average peaked at 0.867 (arrow). The current readings are well above this, although investor panic is nowhere near as intense.

Hence the difficulty in deciding if the signal coming out of Chart 2 is genuine. With all that said, as much as it is tempting to say ‘it is different this time’, it is too soon to declare the signal has lost its efficacy, which would be the case only if both the ratio and the S&P 500 begin to move lower. Historically, as the ratio begins to unwind from overbought territory, the S&P 500 rallies.

Thanks for reading!

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