$$ More Put/Call Ratio

Expanding our view from individual stocks/ETFs discussed earlier, the CBOE tracks three broad-based put/call ratios throughout the day which are best applied to the action in the Dow and S&P:  

1.  The Equity PC ratio;

2.  The Index PC ratio, and 

3.  The Combined PC ratio.  

The Equity PC ratio is generally much lower than the Index PC ratio, as the Equity reflects a retail investor crowd with a tendency to favor longs (more calls), while the Index PC ratio reflects the institutional investor crowd with a greater interest in hedging (more puts). 

The Combined PC ratio gives the trader the best gauge of what the overall market is thinking.  Of the three, this is the ratio I watch.

In his excellent book Mastering the Trade, John Carter writes that if the Combined PC ratio falls below 0.6 intraday, he will ignore all long set ups and start looking at short set ups.  He explains that below 0.6 represents extreme bullishness with near full participation from the long side.  In other words, there's:

1.  Very few left to buy, and

2.  Lots of sell stops sitting beneath the current price, just waiting to be hit.

Conversely, if the Combined PC ratio rises above 1.0 intraday, Carter will ignore all short set ups and start looking at long set ups.  He explains that above 1.0 represents extreme bearishness with near full participation from the bear side.  There are many buy stops sitting above the current price, just waiting to be taken out.

On Stockcharts.com, the symbol for the Combined PC ratio is $CPC.  Via subscription, it can be tracked real-time intraday.  Let's take a look at a 30-minute chart over the last month, with the S&P charted below it by comparison:

As you can see, tracking the Combined PC ratio would have alerted you to the extreme greed at  the yearly market highs in late April, extreme fear after the May 6 correction, as well as the gyrations between greed and fear late last week.  

We'll see if ~1130 turns out to be a swing low, or if the market continues to slide some more before turning around.  One thing is certain, the odds are against you trying to build a short position here with a Combined PC ratio of 1.11.  You should have been looking at long set ups on Friday.