ALERT: The number of calls bought relative to puts has rarely been higher

The put/call ratio offers a good reading on shorter-term speculation. The standard is a one week average perspective to smooth out the day to day noise. We also look at a one month perspective, where we are seeing even stronger readings. It often takes weeks of extreme positioning to create key market inflection points. When investors are bullish and want to use leverage, calls allow for speculation on the upside with limited losses. When bearish, buying puts helps protect downside risks to portfolios. The degree of speculation in November is in the top percentile when compared to the past 25 years.

History suggests that the market is at risk for a correction. The indicator does not tell us when , how long it might last, or how deep it might go. The last strong reading we saw like this was in early September and markets corrected 10%. Other times in the past the corrections we more muted. We typically want to pair this type of indicator with what we are seeing in the speculative and hedging positioning markets like futures. The net speculative position in the NASDAQ and S&P 500 are not confirming for now. From this perspective, we are probably OK for a few more weeks, but the set up is building for a poor Q1 at this point. The Dec 21 index rebalancing and the Dec 16 FOMC are both catalysts for speculation on stimulus and position flows (TSLA).

Look for more in the coming weeks from our new Berman’s Call Probable Return On Investment Index, PRO-II (pronounce Pro Eyes) Indicator. We will be launching the new website in early January so that BNN viewers can follow along with the various risk and opportunity factors we follow.

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