CBOE Put Call Ratio is a Sentiment & Contrarian Indicator

Blain Reinkensmeyer

Posted on Wed 18th Feb, 2009 06:40:16 PM

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I want to clear this up real quick as I received a good handful of emails from enraged over enthusiastic bulls who said that we were crazy for suggesting that the CBOE put/call ratio could actually be considered a contrarian sentiment indicator.

So to clear the records…

1. Yes, we did post that the Put Call Ratio Suggests a Market Sell Off is Coming.
2. Yes, the market did continue to rally the next day with the S&P 500 closing at 868.60 (+2.7%).
3. Yes, our post was featured on the Wikinvest homepage that next Tuesday.
4. Yes, the market did reverse and has since fallen over 80 points or a whopping -9.2%.
5. Yes, the Put Call Ratio can be used as a contrarian indicator.

To repeat what I said last week, “when it comes to investing in the stock market extreme sentiment almost always foreshadows a reversal. This is true on both the upside and downside.”

And what about the CBOE put/call ratio?

Well after bottoming at a fresh 52 week low of .67 it has since shot back up above 1, closing today at 1.18.

Class dismissed.