A Shocking Reading

 | Nov 27, 2012 | 6:00 AM EST
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I would love to discuss all sorts of indicators on the market -- such as the McClellan Summation Index, which is desperately trying to turn up. Or I could mention the Hi-Lo Indicator, which did turn up from that sub-20% area I've discussed over the last week or two. I would love to note that the market is not yet reading at maximum-overbought. I'd even love to talk about the Dow Jones Utility Average, which had a fabulous session Monday.

But the only thing that jumps off the page is that the put-call ratio was extraordinarily low. I want desperately to ignore it, because all the other indicators say the market should try the upside some more. Let me explain why I am so torn.

The put-call ratio came to 63%. The market underwent a serious oversold rally last week, and during those sessions, the lowest the ratio sank was to 75%. On Monday the market was down all day -- and the ratio read at 63%? So I checked back to see, and it turns out we've seen only seen a handful of readings under 70% in the last two years.

The ratio dipped a smidge under 70% in mid-September -- right at the market high that followed the Fed announcement of a third round of quantitative easing. The main difference between then and now is that the indicators were all registering as overbought with negative divergences. Now the market is in the midst of an oversold rally.

Prior to that, I had to go all the way back to July of 2011 to find a reading under 70%. The S&P 500 rallied about 20 points in the following few days, from 1225 to 1245. Then, as you might recall, the market plunged as Standard & Poor's downgraded U.S. debt.

Prior to that there were around four such readings between November 2010 and January 2011. Three of those resulted in downside moves of anywhere between 1% and 2% -- just minor pullbacks. The fourth one was a sideways move, and the time of the year then is very similar to where we currently are.

Now comes the part I am trying to ignore: The index put-call ratio came in at 47% Monday. That is not a typo. I had to go all the way back to December 2007 to find another reading as low as this one. I remember that one as if it were yesterday, because I had rationalized it as resulting from year-end and options expiration. If you would like to understand how wrong it was to rationalize this indicator at the time, remember the S&P was then at 1500. 15 months later it was at 660.

There was one other low index put-call reading in December of 2009. At that point, it had been proper to rationalize the indicator, because the market ultimately ignored it.

Essentially, whether you ignore these readings is your choice.  For my part, I am willing to give the market some room to reach an overbought reading -- but I am keeping one eye on the exit door. That's especially considering the fact that margin debt didn't decline in October.

Margin Debt with S&P 500


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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