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Tre indicatori particolari

Put/Call Ratio - CBOE Market Volatility Index - The Rydex Fund Flow Ratio)


The Put/Call Ratio: Option Sentiment as a Market Timing Tool

The CBOE Equity Put/Call Ratio is a measure of the amount of bullish or bearish sentiment in the market. The "equity" refers to this ratio's focus only on stock options, not index options. Stock options give a better representation of the market's mood. Index options include too much institutional hedging to be considered an effective contrarian indicator on their own.

Nasdaq 100 Trust (QQQ) vs. CBOE Equity Put/Call Ratio

Here, the equity Put/Call Ratio reaches peaks in January around the 90% mark, signalling the QQQ's short-term rally in January. But then as the ratio of puts to calls falls back to the 40% area, this signals a coming decline in February and again points to another drop during the last leg down in late-March. Yet after the nasty downtrend in this chart, option speculators again became fearful in early-April, sending the ratio up above 80%, and a subsequent reading to 85% on a secondary low, set in place an April reversal back up to the 50 area on the QQQ in the just the next two weeks.

Stated simply, the equity put/call ratio is the percentage of puts (options traded expecting a drop in stocks) that are trading relative to calls (options traded expecting a rise in stocks). When the percentage of puts to calls increases, it indicates rising fear in the market, which we interpret as a buy signal at extremes (as shown by moves above 80% in the chart, or moves above the upper 21-day Bollinger Band). Moves down below the lower 21-day Bollinger band (the lower blue band in the bottom chart) or moves touching the 40% area signify investor greed, usually marking important short-term tops as buying power is exhausted.

The CBOE Market Volatility Index:
Contrarian Opportunities at the Extremes

The CBOE Market Volatility index (VIX) was introduced in 1993 by the Chicago Board Options Exchange (CBOE) to measure the implied volatility of the U.S. equity market. The index is calculated in real-time using the Standard and Poor's 100 Index (OEX) options. The index is calculated by taking a weighted average of the implied volatilities of eight OEX calls and puts having an average time to
maturity of 30 days.

CBOE Volatility Index (VIX) - Trends Inversely, Reflecting the Crowd's Pessimism or Optimism

When markets decline, the VIX index typically moves inversely (as seen in chart above), rising to reflect the increase in demand for puts. We use the VIX index as a contrarian indicator of market sentiment. Fear and greed will often take the market to extremes, and the VIX provides an accurate measure of these phenomena. The higher the VIX, the higher the fear, which, as market contrarians, we generally see as a buy signal. In the same respect, the lower the VIX, the lower the fear, which indicates a complacent market. A good measure of extremes in the index is found in the 21-day Bollinger Bands on the VIX. When the VIX index reaches an extreme by closing outside of these bands and then sees a close back into the band, you can expect that shift in the market is likely to occur. Markets tend to bottom due to a peak in fear (on a high VIX reading over the upper band), while tending to top after an extreme in greed is reached (on a low VIX reading under the lower band, like the one seen in the lower half of the chart above, as optimism grew too high on th Fed's surprise rate cut in mid-April).

The Rydex Fund Flow Ratio:
A Unique Indicator of Bull/Bear Sentiment

The Rydex (Nova + OTC)/Ursa) ratio is a measure of how the crowd is thinking - are the majority of mutual fund switchers generally bullish or bearish? The Rydex Fund Group was formed in 1993, and it encourages active fund trading. The three funds we consider when determining the ratio are the Nova, OTC and Ursa funds.

Nova provides 1.50 times the performance of the S&P 500 Index. OTC provides 1.00 times the performance of the NASDAQ 100 Index. Ursa provides -1.00 times the performance of the S&P 500 Index (seeking to act inverse to the S&P 500 - if S&P 500 drops 10%, Ursa should gain 10%). By adding the assets of the Nova and OTC funds, both of which are bullishly-oriented funds, and dividing that total by the assets in the bearishly-oriented Ursa fund, we have devised a way to track market sentiment among fund switchers (RYDEX imposes no restrictions on the number of switches per year, which allows for a free-flowing reading on the bullish or bearish sentiment on any particular day).

Nasdaq 100 Trust (QQQ) vs. RYDEX (Nova+OTC)/Ursa Ratio

The ratio is a valuable contrary indicator as it allows us to track investor fear - the lower the ratio, the lower the investors' confidence in the market, which becomes a buy signal for us at extremes.

For example, when the ratio hits relatively high levels (we define "relatively high" as levels at or above the upper 21-day Bollinger Band, the upper blue band in the bottom half of the chart), we are seeing too much bullishness, as the assets in bullish Nova and OTC funds swell relative to the assets in the bearish Ursa fund. Such peaks in optimism were seen in early November 2000, the second week of December 2000 and late-January 2001. As you can see, all three of these instances marked very significant tops in the Nasdaq.

In contrast, readings at the lower Bollinger Band showed investors are relatively fearful, as assets in bullish funds dwindle and assets in the bearish fund rise, causing the (Nova+OTC)/Ursa ratio to decline. Readings near the lower band in late-November 2000, the beginning of 2001, and the beginning of April 2001 all proved excellent short-term buying opportunities, while the low readings in February and March proved too early against the steady downtrend in the first quarter of 2001. We seek to factor in the strength of the trend when making these contrarian selections, and we also tend to use stops to get us out of signals that aren't working as anticipated. This is due to the fact that when a high probability indicator like the RYDEX ratio is not working as anticipated, it tells you the market trend is likely to continue instead of reverse. Such is the case with good indicators: if they are right 8 out of 10 times consistently, the 2 times out of 10 that they are wrong likely tell you something about how the market is likely to act going forward as well.