The broad market, as depicted by $SPX, remains in a trading range. On the upside, resistance is evident at the 930-940 area, and it is comprised of several items. These present a formidable barrier to further short-term advances — at least until the current overbought conditions abate and new buy signals arise. On the downside, there is support at 880.


SPX Showing Support and Resistance

The equity-only put-call ratios have flirted with sell signals,

but only the standard ratio has a confirmed sell signal — and even it’s a bit shaky (see Figure 2). Meanwhile, the weighted ratio has moved lower and established new lows. Thus, it remains on its previous buy signal and has not generated a confirmed sell signal.

Standard Put Call Ratio

Weighted Put Call Ratio

Market breadth had finally worked off its overbought condition and generated sell signals last week. However, breadth expanded greatly on Monday’s rally, so those sell signals were briefly canceled out before reinstating themselves today. The rally is mature now, so there is a greater chance that the current sell signal will precede a broader market decline.

Volatility indices ($VIX and $VXO) continue to decline, in general, and that means they remain on buy signals. Much has been made on CNBC of the rise in $VIX since yesterday morning’s lows, but as you can see from the chart in Figure 4, $VIX is still clearly in a downtrend. $VIX would have to rise above 34, in our opinion, to break the bullish downtrend and potentially generate a sell signal for the broad market.

VIX

So we can buy at 880 and sell at 940.

Put-Call Ratio for Equity Options

These are the weekly numbers from 11 January 2008 until 20th February 2009.  These equity puts and calls are bought by the smaller trader for the most part.  So you want to bet against this.

The next chart is of the weekly put call ratio of the S& P 100 index of the largest companies in the S&P500 index.  This is used for hedging large portfolios, so this is a gauge of the fears of larger money managers.

S&P 100 Put Call Ratio

If these numbers are useful they have to predict something.  Here is the graph of the closing price of SPY over the same period of time.  SPY is an ETF, and exchange traded fund, that holds the stocks in the S&P 500.

Closing Prices SPY

We are trying to predict the changes in these prices, so that would be a more useful thing to plot.  Here are the percent changes in the price of SPY from week to week.

S&P500 Weekly Return

There are a few things to notice here. The times of greatest volatility, October and November of 2008, the put call ratios where high. There are big movements in both directions, up and down, during that time.  Also, there are times when the put call ratios are high when there isn’t a large move in the index.