The Put/Call Ratio as a Market Tell

What is the current signal?

Are you familar with the put-call ratio? Marty Zweig, a former boss and mentor of mine, developed this indicator to signal market sentiment and positioning to determine future stock market performance. Back in the 1980’s, Marty did this laborious work daily by hand on a spreadsheet made of paper! He would come into the office and discuss his view of the markets with the positioning element the largest input in his analysis. When the market was euphoric and participants were piling into calls and less so into puts, the ratio would drop below 1.0. Similarly, when the market became pessimistic, participants would buy many more puts than calls and the ratio would go above 1.0. Marty would track this daily and smooth out anomalies by using a 5 day, 10 day and 20 day average.

Look at the chart below and you can see at each recent inflection in the markets the 5, 10 and 20 day averages we computed.