Uncommon Put-to-Name Indicator Alerts Good points Forward

• An especially uncommon sign flashed within the inventory market on Tuesday, suggesting huge beneficial properties forward.
• That is in accordance with Fundstrat’s Tom Lee, who highlighted a surge within the put-to-call ratio regardless of a leap within the S&P 500.
• Since 1997, there have been solely three cases when the put-to-call ratio surged above 1.0 on the identical day shares jumped 1%.

An especially uncommon contrarian sign flashed within the inventory market on Tuesday, and it suggests sturdy beneficial properties forward, Fundstrat’s Tom Lee stated in a Wednesday notice.

Lee highlighted that the put-to-call ratio surged above 1.0 on Tuesday, the identical day the S&P 500 surged greater than 1%. That is a headscratcher as a result of the put-to-call ratio usually surges on down days within the inventory market, not days when there are sturdy beneficial properties.

The put-to-call ratio is a technical indicator that helps measure investor sentiment. A measure of 1 for the put-to-call ratio signifies that the variety of patrons of bullish name choices is identical because the variety of patrons for bearish put choices. A measure of above 1 for the ratio indicators that there are extra put patrons than name patrons, suggesting buyers are tilted extra bearish than bullish in direction of the inventory market.

“A surge in [the] CBOE put-to-call ratio usually occurs on a down day. That’s logical: markets commerce down, buyers search to hedge, [so they] purchase places,” Lee stated. On Tuesday, the put-to-call ratio jumped from 0.64 to 1.35, in accordance with knowledge from YCharts. In the meantime, the S&P 500 surged almost 1.4%.

Based on Fundstrat, since 1997, there have solely been three different cases wherein the put-to-call ratio spiked above 1 on the identical day the S&P 500 was up greater than 1%.

“The ahead returns for equities is superb,” Lee stated of these three dates.

These cases embody February 1997, November 2008, and March 2020. All three dates noticed vital up strikes within the inventory market over the following few months and 12 months.

Based on Lee, the S&P 500 delivered common ahead returns of three.7%, 17.5%, and 35.8% over the following three, six, and twelve months, respectively, with a win ratio of 100% for optimistic ahead six-month and twelve-month returns. 

That, mixed with sturdy year-end seasonals, provides Lee confidence that the S&P 500 may surge to 4,500, or about 12% from present ranges, by year-end.