Many Are Betting Market Will Get Rattled Out of This Range

 | Jul 13, 2017 | 6:00 AM EDT
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The S&P 500 has been in the same range since early June. And as previously noted, it is about 2% higher (after Wednesday's rally) than it was in early March. In the past two days, the options ratios have given us some extreme readings. I believe that means many are looking for a move out of the range, either to the upside or downside. But it's pretty clear to me from the readings in the options ratios these last few days that there are some heavy bets being made that we do not stay in this range.

Let's begin with a refresher that on Tuesday we saw the ISE Ratio skyrocket to 216%, a reading it hasn't seen in more than two years. I reviewed the various scenarios that were attached to previous readings, so I won't belabor that. What I will note is that on Wednesday we saw the CBOE put/call ratio down to 71%. It escaped a reading under 70% (bearish, in my view) by a few points.

But what didn't escape a very low reading is the VIX put/call ratio, since it fell to 14%. Remember, this is a bet where folks are leaning heavily on calls on the VIX, meaning they are looking for the VIX to go up, which generally means the stock market goes down.

The first unusual thing is that this is the third time in just over a month we've had such a low reading. We saw two such readings in June, so let's look at what transpired. June 8 is marked with a red arrow on the chart of the S&P. June 9 is marked with a red arrow on the chart of the VIX.

What we see is that we did get some pickup in volatility on June 9, but we also see that over the course of the next week the market rallied. So they were right to bet on a move in the VIX, but the contrarians were correct in believing the market would rally from such a low reading.

It occurred again on June 27. This is the green arrow set. The very next day, the S&P was up strongly (about 1%), but look at June 29 and you can see the S&P fell and the VIX surged. So here again we see the VIX call buyers were right, but it was also correct to look for a short-term rally since the S&P rallied on June 28 about 1%.

I do not like to rationalize an indicator, so I won't. What I would say, though, is that in the past few days there have clearly been some outsized or at least heavy options bets being placed. Somebody is expecting the market to move out of the malaise it has been in for months. And they are making their voices heard through options trading, enough to skew these ratios to extremes.

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