S&P 500 2,050.79 down 8.11.
DJIA 17,774.39 down 48.77
OEX 903.36-5.02
From Dana Lyons Tumblr:
A good portion of our research deals with the behavior of select groups of investors. The majority of the time, our objective is to identify extremes in investment posture by such groups — and fade them. That is, do the opposite of what the crowd is doing. This is what is meant by “contrarian” investing. Over the long-run, the crowd is invariably wrong at key turning points in the market, thus it pays to be a contrarian. (We will reiterate that we are only referring to extremes in investment positioning. During a trend, as such positions are being built up, one is better served by following the trend.)
There are a few select groups, however, that have historically been considered “smart money” due to their propensity to be correctly positioned at extremes. One example of a supposed smart money group is the collection of traders of S&P 100, or OEX, options. OEX options do not draw the attention or volume that they used to; however, the contract at times still generates some interesting signals at extremes. The OEX market is presently flashing one such extreme and, based on historical precedence, it may behoove traders to exercise a bit of caution here.
As of yesterday, December 29, the level of OEX open interest in Puts was more than double that of Calls. This is just the 15th time in the past 15 years that level has been breached.
Open interest simply refers to options positions that are still active, i.e., that have not been closed out yet. As of yesterday’s close, the Put/Call ratio on OEX open interest was 2.08. As Put options represent bets that the market will decline, this represents a rarely seen level of pessimism on the part of OEX traders. And historically, they have proven to indeed be “smart money” when displaying such caution, as S&P 500 returns following these readings have been very poor relatively speaking....MORE
