Is This a True Market Bottom?
I know I have been hitting this HARD this week, but when I say this topic is the MOST important thing right now, I don’t use that verbiage lightly.
I’m talking about the CBOE Equity Put/Call Ratio…
After more than six months of telling you this is the most important sentiment indicator around, it finally came to life on Friday.
For the first time since April 2020, the balance of puts to calls traded on the CBOE favored puts, resulting in a put/call ratio of 1.02 just less than a week ago.
Real quick update on why the put/call ratio is one of the most important sentiment indicators you should be watching – for those of you who live in a cave.
Put simply (yes that is a dad pun for you), the EQPCR is the put volume divided by the call volume traded at the CBOE.
This chart has been a tease over the last couple of months, shooting up into the 0.8 range just to drop back down, leaving us with a market that is still in denial.
Regardless of what the market is doing – as a whole – the sentiment for the market was still bullish… even amidst a technical bear market.
When it goes above one, the math is telling you that more people are short the market than not.
In the rare instances – 38 in the last 20 years, to be precise – where this ratio goes above one, traders tend to lose their minds a bit. When we see that happen, it is followed by them going out and buying protection – hedging their bets.
I have been putting you guys on this track for over a month, we have been paying for insurance the whole time. They are trying to call the insurance company once the fire is already in the kitchen.
This sentiment shock in the market tells us the fear of the retail trader is possibly coming to a climax, but that dosent mean the market is in the same situation.
You see, when this happens and people start selling along with buying puts, it can also come with a momentary blip of green along with it as professional traders come in and take advantage of the situation. They are taking stocks that are sitting on short-term lows and riding the trade for a period to capture some profits, but that can only last so long.
There is a way to stay safe while those rambunctious traders come out to play. You have to watch the moving averages, not my normal 20- and 50-day, but the 20- and 10-day moving averages.
Just like the VIX and the EQPCR, these moving averages tend to spike up in clusters. This exact moment is not the time to short necessarily. You don’t want to buy puts at the base of the trader’s trend lines. We have to wait for those to roll over – that is the time to hit the market hard.
Do you think these traders can carry the market up from the depths and turn this into the true bottom?
Yeah, neither do I…
Here is why.
When I look back at 2008-2009, I see some signals in the current market that tell me Friday’s reading is likely just the beginning.
In the last 20 years, there have been 38 put/call-ratio readings greater than 1.0, marking eight different intermediate- or long-term bear markets.
On average, the ratio spikes about 5 times at each bottom. It’s part of a process! One reading does not do it.
Now, this one may be a bit different, as we are already deeply entrenched in a bear market.
On top of that, remember when I said the last time this happened was 2020?
Back then, we had our buddy J-Pow opening up the faucet, doing everything he could to stimulate the market to pull up from a hard landing.
He is taking a different path on this trip, raising rates and tightening up the ship.
This reduces liquidity in the market, taking a lot of money out of play. It’s both a necessary and dangerous game he is playing.
The bottom line here is – I knew this reading was going to be a big one, and I was going to be looking for some things to buy… That is exactly what I did this past weekend.
I even shared some of those with you earlier this week.
Unfortunately, they were just ideas – a few stocks that shined through as a redemption risk.
Sure, you can take those ideas and run with them. I hope you do. I like to think I work diligently to teach you how to do that each and every day…
BUT, if your mind is getting in your way and the fear of the market is getting ahead of you – just like the traders pushing the EQPCR to this peak… I have a solution.
Check out my Night Trader service. Just yesterday, I took my ego out of the equation and broke one of my own 10 commandments of trading and went short on AAPL… Not only that, I gave a second Idea on how to short AAPL and another idea on shorting TSLA.
Now, I don’t like giving this much away about what goes on behind the velvet rope of the Night Trader room, but at this point, I have to.
I am willing to break my own rules a bit because I watch this data day in and day out. If I can’t move past the regulations I set for myself to make you money, then I shouldn’t be here.
But I still am
I want nothing more than for you to be ahead of the curve and have a sea of green in your portfolio. It is all I think about – how to make YOU money.
We are going to continue to work our way to the TRUE bottom of this market.
I hope to see you in the private room soon so I can give you the best trades imaginable to capitalize on that.
And, as always, I wish you the best trading success.
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September 30 2022
