V.9:2 (61-64): Updating Option Ratios With Market Sentiment by James P. Martin

V.9:2 (61-64): Updating Option Ratios With Market Sentiment by James P. Martin
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Updating Option Ratios With Market Sentiment by James P. Martin

Is it true that market sentiment indicators no longer work? That's the word from many traders and market timing advisors in the past several months. They say that so many "pseudo contrarians" now follow call/put ratios, advisory sentiment surveys, public short selling activity, and so on, that traders are no longer sure whether to bet against the consensus of the public or the consensus of pseudo contrarians. They may think they are going against the herd, when in fact they are part of it!

Many traders are indeed feeling frustrated by the apparent ineffectiveness of sentiment indicators. While many readers commended me for the insight I provided into the behavior of options traders in my article in the June 1990 STOCKS & COMMODITIES, I stressed that the call/put TRIN is by no means flawless and was not a pinpoint timing tool. It requires qualitative interpretation and is best used in conjunction with other tools to enhance its success. As the sophistication of the markets has evolved, traders must expect the interpretation of market sentiment to require more sophisticated thinking as well.


The problem may be in part that technicians have become too predictable. So many good technical analysts are in the markets now that we are stumbling over ourselves. You only have to watch the actions of the central banks to realize that. Why is it that currency intervention nearly always seems to occur at major chart support or resistance? Why is it that the Federal Reserve adds or drains reserves conveniently when bills and Euros are oversold or overbought? The real "powers that be" have also grown more technically astute to maximize the impact of their actions. Since the time of my earlier article, events have occurred in the markets that corroborate several of my earlier observations, demonstrating how traders must refine their thinking regarding contrary opinion and dig a little deeper for clues to extremes in market sentiment.

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