On Monday, we saw that the smallest of options traders had become so aggressively optimistic about a continued rally that they established a record number of bullish versus bearish trades.
That sentiment seems to have spread to the options market at large. This is the first time in months that the 3-day average of the Equity-only Put/Call Ratio has been below 0.5. Our Backtest Engine shows that the S&P 500 has struggled when the ratio was this low.
When we see readings like this lead to poor returns even during bull markets, the current level of options activity is a worry. The saving grace might be that we're early enough in a new bull market to run over any negatives like this, but that's placing a lot of faith in the idea that we've passed the worst of the damage.
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We also looked at:
- What happens when the S&P 500 approaches its 200-day average but can't rise above it
- More and more news articles are talking about FOMO (Fear Of Missing Out)
- The spread between Smart and Dumb Money Confidence is nearing zero
- Financial conditions are easing, both in the U.S. and overseas
- On a monthly basis, growth/value is historically stretched for the Russell 2000 and S&P 500
The post titled Options traders have been very confident was originally published as on SentimenTrader.com on 2020-05-22.
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