Monday, January 17, 2011

The Put to Call Ratio warns again. Are you listening this time?

It should be a quiet day today as the Banks and Stock Markets are closed here in the U.S. for observance of Martin Luther King Day. For those missing market action I decided to recap where we are and what data, if any, was noteworthy from Friday. Well, I found one small piece. It was the Put to Call ratio at the close on Friday. It came in at a 0.57 reading. I thought you would need a context for that reading and so I have included 3 charts below. The first is the Put to Call ratio from Oct. of 2003 to the close on Friday.

As you can see from the above chart, a reading of 0.57 is on the rare side and falls outside the normal range of data with a 95% confidence level. I have identified various dates when a reading this low or lower occurred. Why is this reading important? Well, it is because often it is a sell signal for stocks. I said here, often, not always. The other two charts below are of the Dow. The same dates have been identified on those two charts. The first chart is the Dow plotted linearly and the second chart is the same data plotted on Log scale. Log scale shows a more dramatic change than a linear scale does. Here are those 2 charts.

I think it is quite clear that in all cases in subsequent days following the readings the markets dropped. Some times, like Mar. 16, 2006, it was a small drop of about 800 points and other times it was the massive selloff we experienced where the Dow dropped almost 8,000 points.

We may still rise a few days or a couple of weeks, but we are in store for another correction of at least that 800 points but we could also be at that tipping point of thousands of points again. According to Elliott Wave Theory, we are in for a doozie of a correction all the way to the depths of hell by the time it is complete. These things don't happen in a matter of days months or year. It can take years to unfold but one thing is for sure, when they do come they bring sizable pain. I am not expecting the same levels of depth as does Elliott wave Theory prognosticators, but I do see a drop of at least 5,000 points for the Dow coming and a retest of 6,400 low registered in 2009, which I believe will fail as well in the end. Even the Fed won't be able to stop it when it starts. Not only won't Bernanke be able to stop it but all the Kings horses and all the Kings men won't be able to put Humpty Dumpty back together again!

The real important question to ask yourself is this. What if what I am saying does happen? What actions will you take? Will you start to buy on the dips as the market starts dropping and be buying too prematurely, only to see you selling the stocks you bought and repurchasing them again a bit lower? Or will you just Hold on to your stocks in hopes of a quick turnaround? Or will you be like a Deer in your headlights and be frozen into no action at all? These questions are worth asking yourself. You see they can be grouped in categories like these: Reactive, Responsive and Proactive. Which strategy will be best for you and what does that actually mean? As I learned as a Boy Scout: Be Prepared!

Now for a little light humor. You might call this post today in honor of Dr. Martin Luther King: I have had a Bad Dream!

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