More Options Market Concerns

12/30/08 9:05 AM EST

Good Tuesday morning...we begin the day with a slightly positive tint to the pre-market futures, though once again the moves have been muted.

Volume continues to run at about half its usual pace, which should only get worse as the hours wear on and traders give up the ghost on 2008.  While we haven't seen any evidence of it yet, I wouldn't be at all surprised to see a big trading program or two make waves before the end of the year.

Yesterday we took a look at a couple of put/call ratios, the Total Ratio as given by the Chicago Board Options Exchange and the ROBO Ratio that we calculate from the activity of the smallest of options traders.

Neither of them looked especially bullish for equities going forward, especially the general put/call ratios that are showing a lot of call volume relative to put volume over the past 5, 10 and 21 trading days.

In a "By The Numbers" blurb, we also looked at the ISE Call/Put Ratio from yesterday, which closed above 200 for the first time since August 31, 2006.  A close over 200 means that traders on the ISE options exchange bought to open more than twice as many call options as put options, traditionally a sign of excessive optimism.

According to our Signposts section, whenever the ISE Ratio has closed above its upper trading band (2 standard deviations away from its six-month average), the S&P has shown a positive short-term return about 47% of the time.  That's not a huge downside edge, but the data is only available back to 2002, so we don't really have any other bear market precedents.

The low volume, choppy trading and lack of extremes have shrunk the number of edges considerably, and while the short-term Signposts are still tilted to the negative side, they are considerably less negative than they were heading into yesterday.  That should be a good sign, especially in consideration of yesterday's upside reversal above that 850ish support zone on the S&P 500.  Overall, I'm not seeing much new after yesterday's session, and don't see much of an edge for the short-term.

From a more intermediate-term standpoint, we have gone over a number of different positive indications over the past few weeks (mostly here and here and here), but the buyers haven't been active enough to push us higher.  Maybe we just need to wait until traders close the books on 2008, but it's disturbing that we haven't seen more buying interest.

A move back under 850 on the S&P would have me back-pedaling on the "longer-term rally" idea, and a break of 820 will see me all but abandon it.  What we need to see is a sustained move over 920 to confirm the higher high / higher low pattern that is still valid.

All the best,