One indicator that we follow is that of the 5-Day Equity Put/Call Ratio. In fact it was one of the indicators that helped lead us to call for a correction back on January 12th in our post “It’s Time For A Pullback In Stocks”. A few days later the SP500 started its 9% pullback.
So what is it saying right now? If you look at the chart below you can see that the reading on the 5-Day Equity Put/Call ratio is at its lowest (most bearish) level in over four years with a reading of .50. This of course coincides with a near new high in the SP500. (Click on chart to enlarge)
SP500 and 5-day Equity Put/Call Ratio
While we aren’t calling for a new correction, we do think that we are likely in for a pullback of sorts before moving higher. We remain bullish in the medium term as breadth remains strong and many industry groups continue to break out. While shorting is definitely an option, in light of our longer term outlook we have instead opted to hedge our long exposure with some slightly out of the money options.
Disclaimer-We hold long positions in several industry group ETF’s and puts on the SP500.