The put:call ratio can be used to measure the amount of hedging and the amount of speculation; higher ratios imply increased hedging, and lower ratios imply increased speculation. At the moment, the ratio is near the low end of a decade-long range and implies bullish speculation which often correlates with over-extended markets (chart below).
But this is a relative measure, not an absolute. When we look past the latest decade, we can see that since the GFC there has been historically-low speculation (higher ratios), despite a decade-long bull market (chart below).
We see this as a reflection of the psychological damage that the GFC imparted on investors; a form of investing PTSD. Even though the market has climbed 350% in the 11-years since the GFC, the investing-herd is still in no mood to speculate in the stock market like they used to in the latter part of the 20th-Century.
We have pointed out several times in our Weekly Summaries, that the market is in a very similar position to 1995 based on the Fed funds rate profile and the net yield of the SPX, and now we can add the put:call ratio as another similarity. In 1995, the ratio was at similar levels as today (chart above), but decreased significantly over the next five years as the market rallied 200%. We think that can happen again as the pent-up speculative potential is unleashed by fiscal support and disruptive green environmental technologies.
Some analysts are saying that won’t happen because the market has already gone up 350%, but we point out that in the decade leading up to 1995 the market also rallied 350%, and Greenspan made his infamous “irrational exuberance” remark in 1996, as stocks went on to rally a further 200% over 5-years.
We are on the verge of another once-in-a-generation technological bubble, and the fact that few (or none) of the market participants see it coming, only increases our confidence.
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