Your newsletter states that the Put/Call ratio has been over 1.0 for the past 5 sessions and this is usually an indicator (contrarian) of a possible bottom. Is it possible for the ratio to be so high, not as a sign of a bottom, but as a sign of overall failing confidence in the market in general? (September 24, 2002)
You could very well be right at least in part. There is an awful lot of selling ongoing, but there is also hedging always taking place. A lack of confidence that the market will go up can result in selling (either long term positions or selling short) or hedging to cover long term positions. This protects long positions from downside as money is earned on the puts. Big institutions do this frequently.
The psychology of the put/call ratio is that while there are funds hedging their positions, there are also a lot of options speculators out there that tend to guess on which way the market is going, taking short term, out of the money positions. With speculation as a whole, when the crowd moves predominantly in one direction, that usually means the move is ready to reverse.
Given that the high put/call ratio has yet to deliver a strong reversal, the idea that there are other forces at work such as larger than usual hedging is not off the mark. Ultimately, however, if all of the market loses confidence, that is the usual recipe for reversals. Thus we keep watching all of the indicators to see if they all line up.
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