nicholasbdurham

Analysis of Market Sentiment, Historical Study of PCC

USI:PCC   PUT / CALL RATIO - CBOE
This is a chart of the ticker PCC , where PCC is the put/call ratio ( PCR ). PCC reports the ratio of the number of put options to call options. A high PCR ( PCR > 1) indicates highly bearish sentiment, since puts are bought more frequently in one or both of two cases: First, investors buy puts to hedge their bets when they are afraid of a significant market pullback. Second, day traders and options traders will buy puts in larger quantities when various market indicators point to a market pull back, and thus, they deem it to be a profitable approach. However, when puts are very low ( PCC < 0.7) that means investors are generally highly bullish , and thus do not see the need, generally speaking, to hedge their bets. Furthermore, low PCR also means that puts are relatively cheap compared to calls of equivalent expiration and strike price. Ultimately, given that the 200 MA (Blue) on PCC is the lowest it has been in its history, the chart above suggests bullish sentiment is the highest it has been during the period spanning the past decade and a half. What I conclude from this is that, if the PCR is to correct to a more stable long term value, then puts will necessarily need to increase in the intermediate term. Since puts follow in the wake of a developing bear trend, it is reasonable to assume that the current bullish sentiment in the market is exaggerated, and thus will correct to a more median level in the coming months.

I don't purport to know when, but only that I am confident in my assessment that being more bearish than bullish is a wise outlook given the market current environment. Thus, it is reasonable to suppose that the market will inevitably correct substantially in the short to intermediate term. A reasonable approximation might be half of the 200 days to lift the 200 MA, so, 100 days or about 5 months of trading days.

I performed a second analysis. The two columns I have drawn are for the previous two periods where the bullish sentiment on the 50 MA (Red) was as low as it is currently. The columns are drawn from peak to trough to peak, where the second peak occurs at the bottom of a bear market. The two previous periods lasted 560 and 460 days, respectively. The current period of highly bullish sentiment, as marked from the most recent peak in March 2020, is at 364 days, and counting. Hence, a span of 100 days more would bring the current period to 460 days, thus also bringing it in line with the most recent bear-bull-bear period in 2013-2014.

Conclusion: My estimate of a major Market reversal in the next 100 days, then, fits with the above estimate of 100 days to correct the 200 day MA.