Is the put/call ratio calling a top?

The put/call has shown a pretty good track record of calling intermediate tops and bottoms. The ratio was giving overbought signals this month, but has just reversed. Indeed, the ratio may be signalling that the top is in.

Below is a chart of CBOE options total put/call ratio ($CPC in Stockcharts). The 60 EMA is superimposed in the top panel. The 9 EMA appear in the second panel superimposed over the S&P 100 index ($OEX) as an area. The third panel has the 21 EMA of $CPC, with $OEX as OHLC bars. Both the 9 EMA and the 21 EMA do a good job in picking out the tops and bottoms in $OEX, with the 9 EMA having a few more false positives.

Notice that the EMA's reached multiyear lows this past week, very overbought, before reversing. If this reversal is bona fide, then chances are, the top is in. Given how overbought this index is, the reversal likely is for real. Note, the equity only put/call ratio is not as overbought (see second chart).

I've also highlighted the structure of the $CPC index during the top in October 2007. The index has almost an identical structure this week, complete with the thrust up.

The put call ratio might be signalling that the top is in.


Here's the same chart using the equity-only put call ratio (30 months, instead of 18). Similar story, complete with "air pockets in the index, but notice that the EMA's are still above last May's lows.