Wednesday, May 9, 2007

CXO Advisory Group on CBOE Put to Call Ratio and ISEE

Yesterday, the CXO Advisory Group published an analysis of the CBOE total (index plus equity) put to call ratio, looking out at 5, 21 and 63 day time horizons. They concluded that relative to the S&P 500 index data, the CBOE total put to call ratio is "not a useful indicator for short-term or intermediate-term trading" and found that the put to call numbers are more likely to lag rather than lead the S&P 500 data.

In a follow-up piece this morning, the folks at CXO examined the ISEE data in a similar fashion. While they found a stronger relationship between the ISEE and the S&P 500 index, they expressed concern about the sample size in the course of concluding that the ISEE "may offer a slight edge for intermediate trading," particularly at the 63 day horizon.

My suggestion is that you read both of the CXO articles in full and take a look at my comments about the usefulness of the ISEE 50 day simple moving average and Bernie Schaeffer's recent comments and charts regarding the CBOE equity put to call ratio. Of the three CBOE put to call measures (index, equity, and total put to call ratios), I put considerably more stock in the equity variant, which tracks most closely to the ISEE.

I will have more to say about the ISEE and the CBOE put to call ratios in the future. While I believe that following these ratios is a worthwhile endeavor for gauging investor sentiment, I strongly suggest that they not be the only arrow in your quiver.

60 comments:

pleadership said...

Good sourcing. Another thing I do is I take the 10 day moving average of the equity put volume (CBOE) and divide it into the daily equity put volume. When you get a 2:1 ratio it is a very strong signal that the market is nearing an intermediate bottom.

Unknown said...

CBOE total put:call is actually pretty useful intraday as a contrarian indicator to get an edge on a swing and bet against those who have "already shown their cards". Personally, the best timeframes I have found are 15 and 30 minutes.

dk said...

Very nice spot, Bill. I agree that the raw CPC/CPCE data is definitely prone to headfakes. However, when smoothed with other indicators ($COMPQ:$CPC, etc.), it has a distinguished history of decent timing insights.

Bill Luby said...

Thanks to the three of you for your contributions. F, I hadn't even considered the intraday aspect until you mentioned it. dk, nice job on flagging the call gorge-fest this AM, which has now subsided a little:

ISEE® Intraday Data - 5/9/2007
Value Time
229 12:30
240 11:30
319 10:30

nodoodahs said...

Two items on the CPCE (or EPCR for equity put/call ratio):

I suggest avoiding historical biases by looking at two measurements of the CPCE and their relationship. X might be historically high(low), but might be low(high) compared to the latest Y readings. Better yet, a smoothing of the recent data (average(Z days,X)) might be compared to the latest Y readings. To their credit, they did test X as a ratio to its 63-day average.

Since CPCE is, to a large degree, a lagging indicator (just like the VIX), a better predictor than CPCE (or the ratio of two moving averages of CPCE) might be a combination of CPCE and recent price action.

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