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As regular readers will know, my absolute favourite technical indicator as an isolated indicator of market tops and bottoms is the Put Call ratio. Although it works almost to a treat at calling short term bottoms, it also has a very high hit rate on market tops.

With this in mind, I present the Put Call ratio overlaid against the S&P 500 since the start of the bull market.

It displays an interesting picture in that out of the last 5 occassions when the combined ratio has fallen towards the 0.74 mark on the 10 day moving average, on 3 of those the market has rolled over. The 2 occassions where the excessive bullish sentiment did not warn of a short term top was actually at the commencement of the bull market and in the early part of 2011.

We can see that the current measure is actually the sixth time it has been down here during this bull run and that in fact it is probing new extremes. 

Bearing in mind the record margin debt and the all pervading bullish sentiment, together with a low short volume on the market (it hasn’t paid for nearly 5 years now to be short so why bother many say? Famous last words…), it does not appear that the Call buying is hedging by investment/hedge funds for short positions. It looks like late stage speculation and extrapolation of recent trends. Yet another warning sign to add to the pile… We have continued to layer shorts today.

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