Low Put/Call Ratio is Indicating the Stock Market is in Dangerous Territory
Low Put/Call Ratio is Indicating the Stock Market is in Dangerous Territory. One of the most reliable contrarian indicators of future market direction is the put/call ratio. That’s because options buyers are wrong most of the time. The present low ratio is warning us to be very careful because most investors have become so bullish. They’ve thrown caution to the wind in terms of hedging against a downturn. The ratio calculates the total number of put options that small traders bought to open versus the number of speculative call options they bought to open. The lower the ratio, the less hedging and more naked speculating that they’re doing. As the chart below shows, the ratio is at its lowest level since November 2007. Prior to the financial crisis that sparked a major stock market downturn. This is one of a number of indicators we’ve highlighted in LMTR recently that is warning us the market is in a very precarious position.
I have also added the 5 day put ca.. ratio that is at a multi year low as well.