Put Volume Indicator
by John Bollinger
Although it has been mined for many years, one of the richest veins in technical analysis remains the
sentiment area. Here, money manager and market analyst John Bollinger discusses one such indicator.
The essential idea behind all sentiment work is that the road less traveled is likely to be the more
profitable one. By studying and monitoring the ebb and flow of speculative sentiment, the savvy investor
should be able to determine when to veer off the more congested trading path to explore new territory
outside the accepted norm — often known as contrary philosophy.
The concept of contrarian investment, known as the theory of contrary opinion, is vital to capital
preservation. This theory was put forth in its current form in The Art of Contrary Thinking by Humphrey
Neill, whose work has been carried on by others, in particular James Fraser of Fraser Capital, whose
annual Contrary Opinion Forum and book catalog of investment literature are both highly regarded.
To be a contrarian, you must first know the direction that sentiment is running. Many measures have been
proposed to monitor sentiment over the years, ranging from the outrageous (for example, varying skirt
lengths for women or Super Bowl victors) to the logical (for example, index futures premiums). Some of
the most interesting modern tools have come from the arena of listed options trading. Market analyst
Martin Zweig first proposed that the put/call ratio (Formula1, "Formulas" sidebar) should be used to
monitor market sentiment; the idea was that extremes in the market would be reflected in options
activity, so that too many puts would be bought at bottoms and too many calls would be bought at tops.