Are We Oversold and Over-Bearish?

While single-stock put volume has surged, calls are running wild on the CBOE Volatility Index (VIX)

by Adam Warner

Published on Aug 21, 2015 at 9:53 AM
Updated on Jun 24, 2020 at 10:16 AM

We're kind of at a crossroads here, stuck between Fear and Bigger Fear! Put options are the new "in" thing to own, as we noted on SchaeffersResearch.com last week:

"… [T]he average 10-day buy-to-open put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at 0.73 -- the loftiest level since June 5, 2012, when the S&P 500 Index (SPX) was trading near 1,285. In other words, option traders are placing bearish bets at a much faster-than-usual clip, buying to open puts over calls." 

OK, maybe more like calls are out of vogue, as call volume has dropped 36% year-to-date. And this was before the Thursday implosion. 

That's single stock calls. CBOE Volatility Index (VIX) calls are as popular as ever, per the OptionMONSTER VIX Sonar Report. Again, that's before Thursday. 

Investors? Tough to find a bull these days. According to the American Association of Individual Investors (AAII) sentiment survey, the number of self-identified bulls last week fell 3.6 percentage points to 26.8%.

In all fairness, though, they're not becoming bears (yet), but rather neutral observers. The number of bears dropped 2.8 percentage points to 33.3%, and the number of neutral investors surged 6.4 percentage points to 39.8%. Guessing that will change big time by the next reading.

And then, of course, there's the CNN Fear and Greed Index:

150821Warner

Every component is in Extreme Fear. (Not sure why the index isn't more like "2," so maybe there's an "Even Extremer Fear" setting or something.) 

Oh, and VIX is well overbought too. More on that Monday.

Let me also throw in that the SPDR S&P 500 ETF (SPY) is now well below its 200-day moving average. That's not wildly bearish, per se, but a good simple indicator to stay on the sidelines. 

Yada yada yada, we're pretty oversold and over-bearish here. Most of the time that's a good contra tell. On the other hand, we crash off oversold. If nothing else, realized volatility is overwhelmingly likely to remain elevated as this resolves.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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