UBS' Andy Lees: No, The Surging Put/Call Ratio Does Not Imply A Market Bottom, And May Presage A Waterfall Cascade In Stocks

Tyler Durden's picture

Yesterday when we observed the conventional wisdom explanation that since the CBOE equity put/call ratio is the highest it has been since January 2009 and hence the market must have bottomed, we naturally took the opposite stance, warning that any comparison to past events is necessarily apples to oranges, since the "last time we checked back in January 2009 Greece and Europe were not
about to go Chapter 11, nor was a $900 billion asset purchasing program
about to end." Well, we are not the only ones to ridicule yet another attempt by the media to sucker in the retail investor, who however following the biggest domestic mutual fund equity outflow since August is long gone. UBS' Andy Lees does a far more convincing job, and adds that "the skew to the downside is not reflective of
people being long puts but rather reflects the inability of funds to
carry any significant downside business risk. Putting these two bits of
information/ supposition together, clients are effectively running a
binary position where they can take the downside risk to a certain point
and then must get out no matter what which potentially means a gap down
or accelerated fall in the market, which would coincide with what the
charts are saying sub 1200. With the buyer of last resort, the Fed, no
longer there, the fall could become very nasty very quickly."   

From UBS:

Set Up For A Fall

Several people were earlier pointing to the S&P put call ratio as a reason to be bullish equities; everyone is hedged and therefore the market should go up. Let me put a different angle on it.

Without more information, the index tells us very little. Implied volatility remains relatively low, and I am told that as the market has moved down, rather than the ATM option riding the volatility curve higher, the ATM vol has remained unchanged, ie the curve has come to the option rather than the option moving to the curve. With bond yields depressed, few people have the eear-with-all to finance protection. Far more likely they will have been selling premium to try and boost returns. This matches with the depressed volatility of the market and the grind lower rather than any aggressive sell-off. It is also backed up by our own anecdotal evidence, at least up until yesterday.

It seems therefore that the put call ratio is high because of non-dynamic put sellers against dynamic put buyers. As the market has
gone down, the market makers would therefore have bought the index, dynamically matching the option deltas. The non dynamic put sellers will only hedge their position - (take profit or loss) - when the option either expires worthless or when it is deep in the money and they are forced to cut the position.This is when the potential risk comes if funds have to effectively unwind their positions. I would also suggest that the skew to the downside is not reflective of people being long puts but rather reflects the inability of funds to carry any significant downside business risk. Putting these two bits of information / supposition together, clients are effectively running a binary position where they can take the downside risk to a certain point and then must get out no matter what which potentially means a gap down or accelerated fall in the market, which would coincide with what the charts are saying sub 1200. With the buyer of last resort, the Fed, no longer there, the fall could become very nasty very quickly.   

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GeneMarchbanks's picture

Cascade!? I'm looking forward to that.

trav7777's picture

also lookin for a H&S formation on that weekly chart...expecting a bit of a rally here on something. 

topcallingtroll's picture

Adam Hamilton with Zeal Intelligence is a guy who speculates for a living.

He is not well known, but he is the modern Jesse Livermore and much better. His Zeal Intelligence newsletter is worth every penny. If you subscribe you should read every back issue you can. He is about the most honest guy I have ever met. He does not frontrun his calls. He is not famous enough to influence the market, so he gets in and out simultaneously with his newsletter.

He still believes the market has further to fall before it bases. He is also extremely friendly to gold and silver, extremely friendly. He was buying miners in the late 90's early 2000's. I believe he is trained as an accountant, but he only works as a market speculator and newswriter.

If you really want to speculate then his speculator newsletter is more expensive, but worth it. He (and Kramer) are the reason I got back into the market at its lower end. I hated to do it, but I only make money when I go against what I want to do.

I am going to jump back in monday because I think we are going to have a bounce. I will grab a few pennies and be ready to exit at a moment's notice. risk on for the next week maybe, then it may be risk off again, but even Hamilton will admit no one can always predict the market. He is convinced this is a cyclical bull within a secular bear that still has several more years to play out.

Growyourownfood's picture

True, he is very good. He called the recent silver correction for example. His calls are unequivocal, non-revisionist and his methodology is clearly outlined and consistently applied. Waits for right timing and makes big bets, the way it should be done in my opinion.

chartcruzer's picture

The Put/Call ratio imballance does have SHORT TERM implications in any market per backtesting.  A more complete view long term[s163443482]&disp=P

if you combine with the record low $tick reading there is a very high probability we will get some kind of bounce. However, its impossible to know how large or long the bounce will last.[s208587727]&disp=P

Looks like a shorting opportunity as the bounce (whatever form it takes) ends.

Note from the PSAR signals on the long term charts that we now are a confirmed 'sell' on the major markets.[s236022770]&disp=P

Tech + semi sector is the weakest and a solid short option.[s236313803]&disp=P

hungarianboy's picture

I don't like stochatsics. they can embed and run for quite some time.

Anyway, not sure at the moment since the daily Ichimoku also shows S&P is supposed to go lower. I wait and stand on the sideline for now until some clear signal. I don't need to be in the first row.

cosmictrainwreck's picture

I'd think that Jamie, L-l-l-loyd, Bennie, Timmy, et al, who are all way smarter than me, know damn well all the big money's already been made. GS now so desperate that all they can do is make the stinkin' HFT algos run endless cyles of pump & dump to squeeze out a few more gazillion billion trades at $0.000001573 to guaratee bonuses. I've seen some greed in my time, but this takes the cake....

national treasure's picture

While skynet is guarding 1250 on sp - one can't afford not to own some shorts (long sp puts & faz) The reward could be substantial.    

snowball777's picture

A cliff you could LEAP from. ;)

Newsboy's picture

Chartology in a completely computer-algo rigged "market" is no guiding light. The collapse has to be moved around, bit by bit, so the whole edifice is not destroyed.

What and when? It is known to some, but not predictable from outside, due to poor information.

It looks to me like support is soon to be withdrawn from a lot of things, but I didn't see the $600 billion QE-2 going to European banks. I'm in the dark.

snowball777's picture

sad icarus


to discover the price

  of his mistakes


  in pools

of dark liquidity

Antidisestablishmentarianismist's picture

Reminds me of Peter Ustinov singing in Quo Vadis.

falak pema's picture

"A Waterfall Cascade"...

Sounds like we are heading for Niagara Falls...Will we get to see Marilyn on the boat "mist maid"?

That would be a real surprise...If it takes the wrong turn goes all the way to USA...I'll be looking for Joseph Cotten's body then! A WS asset.

GoingLoonie's picture

1200, then 1050, then 950, then 750, then 666 Wallstreet's favorite number. We always said the price of gold and the S&P would cross, and they did. Next the DOW.

richard in norway's picture

if the markets have a sustained rally, people will want to know WTF is going on


already i have lots of people asking me why stocks are so high when the economy stinks. most folk don't take too much notice of stock markets but they assume that when stocks are going down that the economy is doing the same and when stocks are going up...........


maybe folk will just acept that what they thought they knew is wrong.

cosmictrainwreck's picture

"accept that what they thought they knew is wrong" OUCH. I agree with the hope, but the power of denial is uncanny. We're asking people to see that all the "leaders" are fuckin' liars & crooks and that they've been had. Tall order. Nonetheless, could happen.........

Bazza McKenzie's picture

The evidence is ( that most people know that.  The question is when and how they will do something to protect themselves.

Belrev's picture

Now that zero hedge is highlighting a potential market collapse something tells me we are going to see Dow go up by another 2000 points.

richard in norway's picture



I'm nervous as well, i thought we would see the big drop by now, but i can't see any good news on the horizon. how long can the market rally on "it could have been worse" news

Belrev's picture

There is no market. Shell hedge funds set up by the Rothchild's Federal Reserve trade with each other, bouncing stocks back and forth like ping pong. They can maintain whatever level of streaming quotes they need. A collapse may come if some sovereign wealth fund dumps big time, but their governments have long been in the pockets of the World Jewish Congress. Pick any country and research.

Manthong's picture

Not a far fetched proposition if this is as genuine as it looks:

Skunk works in the basement of the FRBNY?

plocequ1's picture

Lucy in the sky with diamond bitchezz

mt paul's picture

lucy in the sky 

with zirconium 

Highrev's picture

Damien Cleusix' Global Tactical Asset Analysis also mentioned the possibility of a “waterfall decline”.

Markets seems to be in the typically slow and frustrating cyclical top formation process. Our cyclical models are giving sell signals one after the other while leverage is reaching levels typical of cyclical market turns. It would be imprudent to bury the Bull too soon but It seems to be in bad hape. A contra-trend rally is to beexpected so on and the behavior of the markets (participants, internals) during this rebound should be carefully analyzed to decide if we can send the Bulls obituary (a waterfall decline without intermitting rebound would settle the case).

I described the situation like this:

[The SPX] Held it [1263] on a closing basis, but closed below previous ST support. Just above the 200dma too, as well as the lower Bollinger on the daily, but that’s after a multi-session countertrend rally that’s basically gone sideways. The bulls would love this to be a ST “base”, and the bears want to see it turn into a bear flag. The NDX says the bears might get their way, but BKX says maybe not. I think we get an answer sometime tomorrow.

We have two breakouts in the markets mentioned in the above post, the Spanish 10-year and the VIX, but it looks like we are getting reactions in the other two. Are those breakouts to be faded, or are they giving us a critical lead signal?

Everyone’s looking at the same levels. Conventional wisdom says we get a bounce first, but we all know that if that bounce doesn’t materialize, then a flush becomes much more likely, and when markets do the opposite of what conventional wisdom expects, it usually does so in unmistakable fashion.

Thanks ZH for the “up close and personal” look at the put/call and other sentiment readings (especially those that are so often referred to as being “broken”), along with the key levels of thin ice we’re currently dancing on.

11b40's picture

There are so many cross-currents right now, I really don't believe the FED, or anyone else, can actually control things....and chartology means nothing.  However, these charts do have meaning, as well as implications:

Ireland – 5 Year CDS

Greece – 5 Year CDS

Portugal – 5 Year CDS

Spain – 5 Year CDS

Italy – 5 Year CDS

If Europe blows, watch out below.

dracos_ghost's picture

I think it's a sign that the players know a brutal unwinding is going to occur in the next several weeks with QE2 ending. Dollar carry trades will have to be unwound (USD up, stocks/commodities down) and in a hurry. The street seriously believed that Bernanke was bluffing on the QE2 ending and have put themselves in a time compression situation. Money managers holding on to dear life for their 401(k) performance will get dry penetrated pretty soon. Create a loss position in the options instead of the equity to show all is well in the Land of Oz when the quarterly reports go out to the participants.

That being said, it will be interesting to see if there is a short term pop until then. SPX is down for the quarter so I assume 401(k)s are too for the most part. Window dressing then boom? This friggin Eurozone drama is keeping a lid on any USD pop at the moment(everyone just waiting to buy Euros on any positive news), but that's will be resolved on Wednesday, right!(cough,cough)

I never understood why the Fed announced the end of QE2 on an end of quarter boundary. It just created more tension in the system. An off month would have allowed these money managers to transition easier(methadone vs cold turkey). But then again, Bernanke is such a brilliant Ivy League thinker - he must have a reason.


Michelle's picture

The unwind has been happening for many weeks now as the facts are known and bets have been hedged. Everyone hunkered down for a collapse but perhaps we won't see a collapse, that's what I'm counting on. When all the knowns are known and are too easy to predict, certainly there are bets on the other side as just another method of stealing money via the wrong-way bets. We'll see, but I think this fear is overblown and a few will make a lot of money taking the other side.

buzzsaw99's picture

QE2 was never about interest rates, it was about the stock market. Traders are correct to hold their positions. Show me bitchez, just in case I'll buy some insurance. Obviously they have more tricks up their sleeve or bernanke is lying about QE3 not being right around the corner. The concept of a waterfall is humorous to me. [/not advice]

ArkansasAngie's picture

“QE2 was never about interest rates, it was about the stock market.”
Nope … it was about buying Treasuries because nobody else could/would.
Cause … if nobody buys the treasuries, interest rates go up and the stock market crashes. And … if the stock market crashes, pension funds disappear and the sheeple will riot.
Ooops … my bad … it’s all about Washington and banksters keeping their jobs.
Unelect Washington aka throw the bums out.

aaronb17's picture

 "Well, we are not the only ones to ridicule yet another attempt by the media to sucker in the retail investor, who however following the biggest domestic mutual fund equity outflow since August is long gone."

So how did that August, 2010, mutual fund withdrawal go?  Remind me, did we see the market "cascade"?  I remember TD highlighting the mutual fund withdrawals all summer, predicting market doom, and then what happened? 

Right, an endess rally that had the retailers kicking themselves for listening to doomsayers, and playing catch-up all the way up thru a massive four-month rally. 

Ridicule all you want, this top-picking and bottom-picking stuff is way harder than you make it sound. 





cashcow's picture

Everyone is scared sh*tness. Give it till Tuesday and there won't be an offer on an equity/index put in sight. American insurance companies bricking it with smell of freshly soiled underwear in the air.

BORT's picture

There just isn't enough cash in the Market to rally.  If there is a drop, mutual funds will have to have a source to generate cash to cover redemption.  This is a catch -22.  We are going down big time

monopoly's picture

I play it safe with 0 longs. A few shorts but a lot of confetti. Have o interest in this market. Waiting for the turn in miners. May still be a while there.

Highrev's picture

FWIW: I just posted some charts over on my friend Blankfiend's blog.


jmc8888's picture

It's always great to see people see through the lines of sophistry.  I heard this crap spouted on CNBC yesterday (in between Casey Anthony Weiner bullshit which I can't fucking stand and espn a few minutes later), pure sophistry.  It's amazing (well not really) how readily this crap is spouted effortlessly and without anyone calling them on it.  At least on ESPN it's bullshit about sports, and not life and death.

I for one am glad I am at least aware of the machination of this bullshit and frequent places which notice it as well.

Learn the scam.  Teach others.  Then we'll all be in a better position to notice it when it appears and trounce it. 

Thanks for helping lead the way.

sellstop's picture

There does appear to be some bottom picking in the banks the past week. ie, sideways with high volume.

And frankly, I haven't sensed the "panic" that some talk about.

I have had regular people comment on the market tho... I suspect the common 401k person is trigger-happy given the events of the last couple years.


Grand Supercycle's picture

S&P500 weekly chart shows a rising wedge enclosed within a megaphone top.

Be careful folks.