there’s not much to add that wasn’t covered last week. i noticed some typos in my post made friday (…Fear No Evil). i’ve edited the post and the corrections help to clarify that we saw an unusually sharp plunge in short interest since the market’s recent bottom in early june. the trough on those charts was the june 1st reporting period, as short interest is reported on the 1st and 15th of each month.
that sharp drop in short interest has bearish implications since not only does it bring short interest to the lowest level in at least the last two years, but it also tells us that a large percentage of the buying on the concurrent move up in stock prices (easily viewed on those charts) was not natural buying of stocks (long-side, bullish accumulation) but rather short-covering.
one final thing to note is the put to call ratio (p/c ratio). like short-interest, the p/c ratio is an actual measure of where traders and investors are placing or hedging their bets. at first glance, one might say “ok, i see your point about short-interest being so low but the p/c ratio isn’t currently signaling complacency”. the problem with that analysis, or interpretation of the p/c data is that many traders only look at current levels. if you haven’t done so, take a look at these posts that i made regarding the lag-times in sentiment survey extremes. just like those investor sentiment surveys, there is a considerable lag time of usually several months from when extreme complacency levels are hit until that complacency fully manifests itself in the form of stock prices peaking.
the chart below plots the total put/call ratio (top) against the S&P500 (bottom). the white horizontal lines mark the significant market peaks over the last few years. the green arrows mark peak lows (extreme complacency) in the p/c ratio, which just like extreme bullish sentiment readings, came months before the market peaked. the red arrows show how the p/c readings were significantly higher, well into the normal range, at the peak of the initial stock market snap-back rally following the first wave down from the peak. i’ve added a question mark at current levels since only time will tell if we are near the end of a counter-trend rally but so far, there is quite a bit of evidence to support that argument, depending on how one reads the tea leaves.