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.