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The "Smart Money" Has Never Been More Bearish
We have mentioned the put/call ratio of open interest on S&P 100 (OEX) options a handful of times over the past 6 months or so. The reason is that this historically “smart money” indicator has been flashing warning signs off and on during that period. On March 3, we posted our most recent update on the indicator as it was on an unprecedented string of bearish readings. The stock market peaked simultaneously and has drifted sideways in the 6 or 7 weeks since. The bearish OEX put/call readings have not relented, however. In fact, the bearishness has accelerated. Even so, we had not intended to dedicate another post to this indicator so as not to be redundant. However, the readings over the last few days warrant an update as they have become so extreme, they stick out on the chart like a sore thumb – kind of like Wilt Chamberlain’s 4th grade class picture.
As a refresher, we typically scan for extreme readings in put/call ratios in the options market in order to fade them. For example, when a certain put/call ratio reaches what has historically been a high extreme, it is often a “buy signal” in that market as it indicates that traders have become too fearful or bearish due to their preference for puts relative to calls. One market that has historically been an exception to this “contrarian” rule is the OEX options market. For whatever reason, these traders have, more often than not, been correctly positioned at market extremes (i.e., high put/call readings near market tops). And while volume in the market has dropped significantly in the past few decades, its non-contrarian status has not seemed to change.
Since 1998, the put/call ratio on open interest in OEX options has been considered extremely elevated when it has risen above 2.00. From 1998 to 2011, there were just 6 days when the ratio got as high as 2.00. Each of those days either came in the vicinity of a significant market top or at least presented extremely limited upside in the intermediate-term. In the second half of 2014 alone, there were 8 readings. And 2015 has ratcheted up the frequency of such readings to a whole other level. There have now been no less than 34 readings above 2.00, all coming in the past 2 months.
And it hasn’t just been the frequency of the readings, but the magnitude as well. Before a week ago, the highest level of the OEX open interest put/call ratio since 1998 was 2.31 in November 1999. The past 2 days have seen readings of 2.77 and 2.79!
It isn’t difficult to spot the “Wilt the Stilt” readings on the far right of the chart, nearly 0.50, or 20%, higher than any other reading on record. And based on historical readings above 2.00, this would appear to be a warning sign. Consider the performance of the S&P 100 following other readings above 2.00 from 1999 to 2014 (it is obviously too early to judge 2015′s readings and, additionally, the 2014 readings do not have a 1-year forward return or, for some, a 6-month return.)
Obviously, considering these returns came during a 16-year period of historically below-average returns, it’s not surprising to see them somewhat depressed. However, the negative average return out to even 6 months (-0.02% to be exact) is noteworthy. Furthermore, considering the substantial drawdowns suffered in the aftermath of several of these readings, the above returns may actually understate the risk following put/call readings above 2.00. Consider the dates of the occurrences prior to 2014, including November 1999, June 2003, May-July 2007, May 2011 and January 2012. Of those, only the 2012 occurrence did not result in either sideways action for 3 months (2003) or a major selloff (each of the others).
Of course, we cannot dismiss the occurrences since the beginning of 2014. Obviously, they have not (yet) resulted in anything close to the aftermath of most of the prior occurrences. However, even they have shown to be somewhat effective in forecasting at least short-term weakness. Of the 24 put/call readings over 2.00 since the start of 2014, only 5 really showed gains 1 month later.
The obvious question, pertinent to many of our posts over the past 12 months or so, is whether the recent market regime is here to stay or whether it is the outlier. As we stated in a previous post, we would argue that is is too soon to pass judgement on the indicator’s contemporary relevance on the intermediate to longer-term time frame. At a minimum, based only on the results over the past 8 months, we can accept that elevated readings of the OEX open interest put/call ratio suggest merely short-term negative connotations for the market.
However, given its more extensive history as a warning sign as well as the current “off the charts” magnitude of the indicator’s readings, we can’t help but wonder if there will eventually be longer-term ramifications as well.
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If they are bearish, they are getting their asses handed to them.
I've been reading about the "smart money" since 2013.... they sure are suckers and not very smart - missed about a 20% move to the upside, speculating on a 10% move to the downside. I think "smart money" is Zero Hedge readers like me who have lost a lot by not being "dumb money".
Agreed. One thing for sure is all of those dartboard and monkey shit flinging momo long positions will crash one day. All those 401k gains and the like will vanish in the blink of an eye.
Philo, I don't know what to believe any more. If one looks at all the countries that had hyperinflation the stock market was the place to be, up billions of percent. The "market crash" can ALWAYS be averted by hyperinflation.
And what good does it do you to own shares on the Zimbabwe index when it hit hyperinflation?
The real 'Smart Money' doesn't play in rigged casinos...
[Cash, Bonds, Gold...]
I think that working for a living is a "rigged casino". And "not playing" is engaging in playing. The only North American people group that are not playing are the Amish, but even they use fractional reseve local banks for their loans to farm. EVERYONE IS PLAYING, even you.
I love posts like this: it tells me that the end is near. When the shorts become critical? It's time for a nice sell fest. I remember when all Fleckenstein's readers strated bad-mouthing him? About three weels later the markets starting coming undone and never looked back. Even the fed cant prop up real sellers in size.
There has to be a blow off top at some point.
When there is hyperinflation there will be a blow off top - but Dow could be 200,000,000,000 by then and S&P could be 100,000,000,000 by then. ... Look at Weimar stock market, or even Venezuela, up 300% per year. Put yourself in Warren Buffet's shoes, he is stock king and he would kill Fed bankers if his stocks crashed. Maybe there never will be a crash.
Thats what i'm starting to believe. This can never come down. the only viable thing to do is BTFD and use the gains to buy hard assets. either way you win
Priced in what? Thats the problem.
Wilt "the Stilt" Chamberlain!
2001-2008 was a seven year bubble cycle.
2008-2015 would fit the cycle, and the big money always gets out before retail.
I freelance over th? internet and earn about 80-85$ an hour. I was without a job for 7 months but last month my paycheck with big fat bonus was $15000 just working on my computer from my home for 5-6 hours. Here's what i have been doing... www.globe-report.com
and yet the VIX gets MONKEY HAMMERED day after day
Does this mean the bottom is in ?
Too big to fail isn't solely a banking issue http://market-guru.co.uk/tesco-and-too-big-to-fail/
can anyone tell me why oex 100 traders are considered "smart money"
In the turbo charged world of stimulus, smart is a disadvantage not an advantage. Blind faith in the religion of QE is the key to riches.
Just floating down the shit river in a leaky boat and no paddle. Reality has to be avoided since reality sucks but I'm just waiting for Apple not to sell buttloads of their over-priced toys or Boeing to have a large order cancelled.....
row row row your boat bitchez
Apple just figured out the way to sell their new watch is to put two ounces of gold in the case.
and who exactly is going to pay those option holders when everyone goes bankrupt?
I used to consider myself smart money sometime ago. Then, I got my ass handed to me on a platter.
+1 Philo The irony is that its the dumb money making all the money. And we are going to get a huge breakout here - perhaps even tomorrow - so that the smart money looks even dumber. And the dumb money look even smarter. Its what happens when you change money - you change everything - everywhere. A dialectical yet nonsensical market where losers are winners and winners are winners. Its the pinnacle of the State's managed success - of everything. There will be no Lehman carnage.
not since lehman.
Printing up money makes Everything Wonderful! simple... why did thay wait so long to start?
It is going to get a lot more weird before we see any semblance of reality.
It is noteworthy that Wilt Chamberlain's fourth grade class had 36 students (assuming that no one was out sick that day). This is far above the number recommended by educational experts for effective teaching.
and that's probably why he was unable to do something honorable like become a bankster.
bearish is bullish...
bullish is also bullish
Shmehitah coming
Well, i dissed your chart reading this morning when you said futures were ( surging ) but you are spot on with this one. As a matter of fact, the decline could start any day now. Just my humble opinon...:)
The smart money does HFT....invest for 6 seconds and hold nothing! Just punish everyone.
so statistically if I buy moar stocks right now I only have ~60% chance of earning a 3% return in the next year.
that is scary bad, what ever should I do? Is it time to panic?
Expected value = 1.8%. Could be worse. Could be 0
double post
This shows just how wrong the smart money has been recently, they still think we're in the old world.
It's the Janet Plan to move sideways for the next ten years while rates are slowly raised. Have a nice VIX.
Think of it like a jar of VIX-o-line
No doubt that is the plan, but don't forget about the many outlier events floating around out there ? We all live in massive illusions and they can only be maintained until the day they can't !
If central bankers globally continue to leave rates at zero, the market can keep melting up and up and up into the biggest valuation bubble ever in the history of markets. It isn't investing, it's gambling and speculating, but it will likely continue. Any down day gets a central banker verbal response and easing moves continue to pile on globally. They are going to keep stimulating right over the top, they can't help themselves.
Begs the question. If central bankers never move rates off zero, why do we pay them or even keep them around? Even the ads tell us overstimulation lasting more than 4 hours requires a visit to the doctor. This cycle has run almost 7 years.
+1 Its true. There is nothing stopping the price of assets to approach infinity while interest rates remain zero bound. Aset prices could actually appreciate on a stealth grind up for who knows how long - as long as CB's keep buying (which they are). It will beinteesting to see how ZH couches historical observations once this market breaks out - just as the $DAX, $NIKK, $HSI, $SSEC, etc. the reference to "Not since Lehman....." will no longer be relevant.
The Smart Money shouldn't even be in USD$.
It should be in a Russian bank earning 16%.
This time it's different
This is pure fiddlefaddle . . . I would be concerned if this senerio took place in a real market. The worst that may happen is sideways movement as the fed sticks their fat finger into every 1% move down. A big decline will not be allowed . . .
The "smart money" is always in the "other" market.
Is the smart money the money who bought those puts, or is it the ones who sold them and expect to just hold onto the premiums?
i got my indicator over the weekend. at a party, the conversation turned to the stock market. i kept my mouth shut because i was the only one there who actually knew something about the market. my only comment was, "everyone is a genius in a bull market." they thought i was making fun of them.
it has been 7 years since the last correction. the next one will make these people much wiser. i hope they think of me when they see their wealth effect turn into a poverty effect.
I submit with weekly options expirations, who knows if the statistic means anything now. We have leveraged trading of leveraged EFTs and Futures, bought with debt with the Feds ZIRP. Cash is risky; an IOU is an asset even when collateralized by debt. WTF, Rod Serling would be perplexed at the script the Banksters have written for this one. What the hell did I just say? Oh hell BTFD BTFATH
well after reading many of these posts i am relieved, that i am not the only crazy one...it seems that the power elites debt does not matter, by that i am talking about gov. ,fed, super rich. they consider debt as leverage...leverage over us...because the little peoples debt does matter...its debts equal power...power over the masses. one could postulate that the markets are maybe to big to fail...but how in hell can you unwind that crazy spring...the bond market carefully and in an orderly manner...I surely don't know...and I am begining to think those in control or lack there-of have no clue either. If they let this drop to much or to fast they may...and thats a big maybe... lose total control of the whole thing...and boom back to candles and beef jerky, not to dis beef jerky it is rather good eats...but what will the vidiots do when their phones stop managing their lives...alas the proverbial kick in the BALLS.
Waiting for VIX under 12, UVXY lower daily Bollinger touch, SPX upper daily Bollinger touch.