One of my favorite market internals to watch is the put/call ratio.
It measures the ratio of traders buying puts (bets the market will go lower) to those buying calls (bets the market will go higher).
So the higher the ratio, the more bearish investors are and the more money they are betting on prices to go lower.
If you’re using TradingView, enter the ticker symbol “PC” to view a chart of the Put/Call Ratio.
You would think that higher readings mean stocks are going lower.
In reality, a very high reading usually signals the low for the market.
By the time the economic outlook is rosy and optimistic, stocks will already be well off the lows.
Bottoms tend to occur at the point of peak bearishness… when the last stubborn bull throws in the towel and sells his stocks.
This is the moment of final exhaustion and only then can a new bull market get underway.
I watch 2 significant levels… 1.20 and 1.40.
Readings of 1.20 are higher and often signal a short-term low and a coming tradeable rally higher.
In the chart above, notice the 1.28 reading that came in June of this year…
That came within 3 days of the market bottom and was one of the reasons I called for stocks to begin moving higher later that month.
Readings above 1.40 are even more reliable and are almost always seen at the bottom of a selloff.
I’ve often marked other significant market lows on the chart and the corresponding spike in the Put/Call Ratio.
After Tuesday’s bloodbath, the ratio stands at 1.12. This is high, but I’m betting it goes higher.
Look for a reading above 1.20 and preferable 1.40. That’s your signal that we are near the bottom and it’s time to start looking for signs of life.
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Editor, Stock Surge Daily
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