Archives

The Contrarian
Robert J. Ogilvie

November 13, 2008

The Put/Call Indicator

The CBOE Equity Volume Put/Call (PC) ratio’s 10 and 20 day moving averages (DMA) are used to filter out a lot of the noise generated from the day to day variation in option volume.  Market highs and lows are indicated by the moving average breaching below 0.65 and above 0.80, respectively.  A signal is identified by a reversal of trend and a confirmation is done once the 10 day SMA crosses the 20 day SMA.



The 10 day SMA of the CBOE Equity Volume Put/Call ratio has begun to tick high after bottoming out on Friday.  Normally, the signal changes to Negative on a reversal at or below 0.70 but the 10 day moving average bottomed out at 0.756.  Today the 10 DMA closed higher at 0.84 and the 20 day SMA closed up at 0.818.  As you can see the 10 DMA closed above the 20 DMA.  Therefore, the signal is back to a Negative Bias.  We are once again looking for the 10 day SMA to dip down to before switching to a Neutral bias.  SIGNAL: NEGATIVE BIAS

Volatility Index Indicator

The $VIX is the CBOE Volatility Index.  Traders refer to this index as a “fear gauge” that is intended on determining the price at which option traders are willing to pay for portfolio protection.  Therefore, the higher the $VIX is the more the fear that is being expressed.  As a contrarian, I have to be an amateur psychologist by interpreting various indicators that look for peaks in fear and elation.  Historically, the best times to buy are at points in which fear is at its greatest.  Normally, when the $VIX is high its time to buy.  At some point I determined that using the moving average cross over was a valid indicator that smoothes out the volatility of the volatility indicator.  Now that the 10 day moving average of the $VIX (CBOE Volatility Index) is below the 20 day simple moving average (SMA), the signal has been changed to positive.  As I have mentioned previously, it is prudent to adjust one’s portfolio bias at times the $VIX tests the 10 and/or 20 day SMA rather than on the initial signal switch.  As of last night, the $VIX closed above the 20 day SMA.  This can be an early sign that the tides are once again shifting and a new Negative signal may ensue.  However, it is probably best to shift the signal to a Neutral bias until the $VIX can head back lower.  Last week I made the point that the 21 day Average True Range (found on most charting packages) is fairly close in value to the $VIX.  The $VIX reflects the option market’s implied volatility or range while the Average True Range (ATR) represents the historical volatility.



The $VIX’s closed yesterday up at 66.46.  The 10 day moving average closed down at 58.64 from 58.92.  The 20 day moving average also closed down today at 63.2 from 63.33.  The $VIX indicator is now Neutral until the $VIX closes below the 20 day SMA.  SIGNAL: NEUTRAL BIAS

Investors Intelligence

The Investors Intelligence Bullish/Bearish polls represent the percentage of investment newsletter writers that are bullish, bearish and calling for a correction.  We try to determine the crowd’s psychology by looking for signs whether the masses are extremely bearish or bullish.  When signs of either of these occur they help define a buying or selling opportunity.  

The percentage of bullish advisors increased a little more to 31.9% from 30.3% last week.  The percentage bearish advisors decreased to 46.1% from 48.3%.  The spread between the Bulls and Bears (shown below) ticked up to minus 14.3 this week from minus 14.2.  As I mentioned last week, the spread is still well below 0 but the fact that it is moving upward and it broke above the July lows (-20) provides support to the signal remaining a Positive bias.  SIGNAL: POSITIVE BIAS



SUMMARY:  The $VIX indicator is back to Neutral because the $VIX closed above the 20 DMA.  The Put/Call Indicator is reading Negative while the Investor’s Intelligence, the most delayed, is still at a Positive Bias.  The net signal is Neutral bias.  That could mean cash or a long portfolio that is hedged to nearly no Positive deltas.
 
Robert J. Ogilvie

CIO & Portfolio Manager
Skybox Trading
skyboxtrading.com
 
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