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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.

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

I have also added the 5 day put ca.. ratio that is at a multi year low as well.

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

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Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

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