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Equity Put Call Ratio – An Up Indicator

The chart above (courtesy of Helene Meisler) shows the Equity Put Call Ratio. You’ll see that the graph’s highs in August and January (coincident with the market turning points at those times) have been circled and that the current high is even higher.

The Equity Put Call Ratio shows the ratio of puts bought against a market correction to calls bought in anticipation of a market rally. The more puts bought means that market participants have been sufficiently scared to the point where they think the market can’t go up. This is generally the turning point in the market as this is a contrary indicator.

If you have cash to invest, I’d say that now is a good time to buy something, like an ag stock that may have been unfairly beaten down but which will jump back with more strength than the market in general. Unfortunately, this market is in turmoil and once it goes up, it will likely come back down. That means, you need to be nimble and buy strong sectors when markets get ready to go up, then sell weaker sectors when markets get ready to go down again. It is the only way to stay ahead in a market like this and it gives you an opportunity to reposition your portfolio for the coming resumption of the bull market. Use it to get overweight in the strong sectors that will outperform on a sustained basis: ag, energy, infrastructure, defense (unless Obama wins the Presidency – McCain and Clinton will maintain a strong military so they are not a determining factor in this sector), biotech, and precious metals.

In August and January, the market put in a bottom and rallied double digits (in the strong sectors noted above, but not necessarily in the broader averages) within a few market sessions, so you likely have a day or three to make changes in your portfolios. You should use them wisely – we are.