Guest Author: MacroTides (See ‘About the Author’ at end of previous article.)
One of the important market indicators we follow at is the total Call-Put Ratio, which is compiled by the CBOE (Chicago Board of Options Exchange). The chart below shows the DJIA and the 10 day average of the total Call-Put Ratio. Since the March 2009 low, the C-P Ratio has dropped to 1.10 (110 calls for every 100 puts) on 6 occasions, as noted by the vertical lines. July 2009, February, May, July 2010, March and now June 2011. The May 2010 signal is denoted by the red line since it was early, in part due to the flash crash on May 6, 2010.
Sentiment indicators can be very helpful, once they reach an extreme. But if the ‘news’ gets worse, the level of bearish sentiment can become even more negative, which is what happened in May and June last year, when the Greek sovereign debt crisis erupted.
In the next few weeks, the second European bank stress test results will be released, and another bailout of Greece is needed. As we have often said, it isn’t a question of whether a full blown sovereign debt crisis will occur in Europe, only when. The next few weeks will prove interesting as the ECB and IMF attempt to provide Greece with more money, without requiring banks to take losses on their existing Greek debt or trigger an outright default.
We don’t use the 200 day average in our work, but many investors do, which is why we pay attention to it. The 200 day simple and exponential moving averages on the S&P 500 are between 1260 and 1265. These averages are likely to provide some support for the market.
Based on sentiment, momentum, and the location of the 200 day averages, we think the market is within 2% to 3% of a trading low. We recommend taking a half position now, since we are bottom fishing. We will suggest adding, once momentum has reversed. Buy the S&P 500 ETF SPY, using a close below 1230 as a stop.
Editor’s note: This article is not intended as general advice for all investors. Before considering the ideas presented by the author, each individual should evaluate their own objectives and risk tolerance. Consultation with your own investment advisor is recommended.
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