Here is a chart of the put to call ratio when compared with NASDAQ's ETF, QQQ. When the line is at the bottom of the PC chart, that means market participants are net short. When at the top, they are net long.
I'm sure we've all heard the saying that market makers usually take the other side of the trade. This chart shows that this is a true.
When stocks are going up, the majority of retail traders are shorting the market. When the market goes down, the majority of retail traders are longing the market.
Right now we're in an extreme situation where the majority of retail traders are shorting the market and institutions are doing what they do best, hitting their stop losses and squeezing them out, essentially taking the free money on the table. When this is no longer profitable, the trend usually changes with a few exceptions (see March 2020). To look at it another way, institutions make money on retail trader's emotions which is specifically disbelief.
They say 90% of retail traders lose money trading the stock market. I believe this chart is evidence of that.
Comment
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Some have pointed out in the comments that my assessment that more puts than calls are being purchased at the current moment is incorrect. However the analysis still stands that the put call ratio inversely follows price.
Also, yes institutions and high frequency trading firms are buying order flows from brokerages like Robinhood to run the stops and to take the other side of retail's trades.
You have it backwards here. PC at the bottom indicates that more calls are being bought than puts (i.e. market is complacent). Notice the spike in PC during sell off, thats because puts/protection is being bought.
TradingView
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@tdrake2139, Good correction to this post. Thanks for sharing this chart @ttrending even though there is an error :) - glad the community could help fix your analysis using the comments.
tdrake2139
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@TradingView, No problem, happy to help! trying to learn and give where I can !
Department_of_Futures
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You should look again at your interpretation, it's a ratio of puts:calls so more puts being bought (market is biased short) means a higher number.
SuperSentient
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@dwats76, Agree, at the moment looks like it should be read at around 0.7 puts to 1 call, so market biased long here.
JosephTran4
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"When the line is at the bottom of the PC chart, that means market participants are net short. When at the top, they are net long." ? The Put/Call Ratio should mean that a higher number is net short and a lower number net long. How do you get the opposite? Anyone? Is the ratio flipped somewhere?
zachyam
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Got the same question too
Benz0519
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@tdrake2139 @dwats76 Does the put call ratio by itself really tell us anything about bias without knowing the motive for the position? For example if I am buying puts for protection then I am long (I think the market is going up and I am protecting against being wrong) but if I am buying them to trade then I am short the market (intrinsic value of put will grow as market drops).
tdrake2139
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@Benz0519, its just one input to help judge overall sentiment. As of right now, you can see there are way more calls being bought than puts, indicating complacency. Additionally, if you look at 30 day implied vol vs realized vol, there is a massive discount, again indicating complacency.