So, Something big Happened.
The Equity Put/Call Ratio (EQPCR) – a measure of the number of traded put options divided by the number of traded call options – finally hit 1.0. (More on that to come…)
What that means is it’s time to start looking at short-term buying opportunities in the market.
As always, the first thing I do is check out my Skittles chart.
For the uninitiated, that’s my heat map chart of the different ETF sectors I use to find the right combination of support and relative strength. It’s colorful. Skittles. You get it.
Let’s take a look…
Right off the bat, you’re going to keep your eyes on everything that has a commodity connection. Steel, oil, homebuilders. These types of sectors are going to get hit over the next month or so.
Going a little deeper, you’ve got the XLB, XOP, XES, XLU, KIE, XLF, IYR, and the XHB. Keep an eye on these inflationary sectors, because they’re going to be the ones that will be the easy hits from the sector level. You should be looking to buy puts on these.
Now, usually, I use the Skittles chart to show you what’s going on in the market. But I want to go even further for you guys and use some of the data – the EQPCR data, but also the more granular-level stuff – and start to look at the companies that are seeing some pessimistic extremes.
The stands say that if I’m looking for a EQPCR above 1.0 for all companies (the CBOE EQPCR), it wouldn’t be bad to see some companies that traded with a put/call ratio themselves of 1.0.
More people trading puts than calls on the individual companies. They go hand in hand. Chocolate and peanut butter.
Let me explain really quickly.
What we do here is take advantage of not just technical patterns, but also the psychology of trading. The true psychology of trading, where people are taking money out of their pockets and putting it on the table.
We track all of that data to find out how people are voting with their money.
A dollar on the table is a 1,000X more valuable than somebody’s spoken word about whether they like a stock or don’t.
That’s why I watch the price activity and the technicals every single day. They tell me what people are doing. Meanwhile, the sentiment – puts and shorts – tells me how they’re doing it outside of just the stock price.
It really is the missing link when you’re looking at the market.
So, I went through and pulled the 20 most active options on Friday of last week. These are the companies that saw the most activity that were trading higher or lower – along with their individual put/call ratios.
This is the watchlist I’m going to be focusing on for the next couple days.
Right at the top is the big boy TSLA. On average, its put-call ratio has been around 0.82. As you can see, it’s sitting at 1.09.
That’s a big number. Since the 1.09 is an extreme, it tells you that TSLA’s going to be a nice little place to buy puts for at least the next couple of days.
Going down the list, AMZN is in the same category as TSLA. People have been looking for opportunities to buy it, it’s one of what I like to call the “Four Horsemen” of the QQQ.
AMZN, TSLA, MSFT, AAPL – they’re going to get purchased. MSFT is one of the ones that I’m going to short right away though.
When you look at its EQPCR, it’s been averaging a 0.67. Well, it had a 0.68 on Friday. Nobody bought anything on MSFT. Stay away from it.
In fact, I’d be looking to buy puts on all of the “Redemption Risk Stocks” like AAPL, TSLA, MSFT, and GOOGL as a sample, period.
So, as a general rule of thumb, your companies with the higher EQPCR – you should be looking to buy puts in the short term.
Anything in red, you’re going to look at these with a little bit of a suspicious eye over the next few days and look to position yourself for a market that’s going to move lower.
Because it is.
This is a gift right now, and I hope you see it this way. I normally wouldn’t give away this much data.
These stocks are getting a momentary reprieve. But there are still some key things you need to understand about the EQPCR to really know how to capitalize on these changes.
So, make sure you have your eyes on your inbox on Thursday and are watching the show the next few mornings, because I’m going to give you a crash course on the mechanics of this.
It’s key to your ability to set yourself up for success.
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September 27 2022
