The CBI rose once again today from 6 to 8. It has now passed the threshold of 7 where I normally begin taking on index exposure. I’m wary at this point because although individual stocks are extended, the index itself isn’t. The SPY is just now starting to break down out of its recent range. It lies about 2.5% above the intraday January lows and there’s a chance of cascading action from here. Spikes to 7 or higher are more typically accompanied by a mature selloff – not a fresh breakdown, hence the reason for my caution. A reading of ten could easily occur as early as tomorrow. If it does I will then likely begin to scale into the index trades with higher allocation.
The CBOE put/call ratios gave some interesting readings today as well. The equity-only put/call ratio, which has been tracked since October of 2003, posted a reading of 1.12 on Thursday. There have only been two other days with reading this high – June 14, 2004 and August 6, 2004. The June reading led to a brief bounce that lasted 7 days before the market started its next leg lower. The August reading led to a two day bounce. The low was taken out 3 days later by a whisker. That then marked the intermediate-term low as the market went on to stage a nice rally from there.
The CBOE total put/call ratio came in at 1.27. While high, this isn’t nearly as extreme as the equity p/c discussed above. What is interesting here is that this marks the 7th day in a row where the total put/call ratio has closed at 1.10 or above. Going back to 1995 the only other time this has happened was August 3, 2007. That led to a 3-day rally before the final leg down of that selloff began.
While I’m seeing some measures of extremes like the CBI and Put/Call Ratios above, others seem lackluster. For instance, the VIX has yet to spike sharply. Also, volume today was light. Fear is normally accompanied by volume. Tough to call it panic selling with so little participation. In summary, small dabbling may be ok, but other than my trades which comprise the CBI, I’m not getting too aggressive on the long side just yet.