Stock market sentiment is currently quite mixed, which might actually be a positive indicator given that the major indices are hovering near their peak levels. One measure of this sentiment is the five-day CBOE equity-only put/call (P/C) ratio, which has been showing trends of pronounced optimism, ranging from 0.51 to 0.59 since the middle of September. This signifies a substantial period of bullishness among those dealing in equity options, unmatched since the extended period from late 2020 to late 2021 when stocks performed exceptionally well. Observing this, it’s clear that sentiment plays a crucial role in market dynamics. Investors generally manage to ride the wave during a bull market but often miss the mark during the major market lows and highs.
Another important takeaway is that the stock market seldom takes a downturn until these option investors start shifting away from their bullish stance. This is why low P/C ratios aren’t typically a cause for concern. However, when the 21-day P/C ratio begins to trend upward, it might be a signal to reevaluate your positions. Since September 2024, the 21-day P/C has been generally declining, although there have been a few upward movements that ultimately turned back down.
