Being that there is an abundance of pessimism in today's equity market, it is only natural that we should review the scope of that pessimism relative to the past. The chart below displays the 200 day moving average for the combined put/call ratio only. I have noted previous circumstances of gloom as reflected in a dramatically increased moving average during the calendar year. 2015 marks the fourth greatest increase in the combined put/call ratio since 1996, which is as far back as my put/call ratio chart goes.
The other instances of a dramatic increase in the put/call 200 day moving average took place in 2001 (+22%); 2011 (+14%); 2002 (+14%). This year the 200 day moving average of the put/call has increased 10%.
Put/call ratio 200 day MA only
In 2001 and 2002 the pessimism was justified coming off the bursting of the technology bubble. We were in a recession. There was a prevalence of systemic risk. The Federal Reserve plunged the liquidity sword deep into the bowels of the economy by taking the Fed Funds rate from 6.5% in 2000 to near 1% in 2003. This is by no means the economy of today.
The Fed is confident enough in the economy to be on the path towards a normalization of interest rates. There are no pockets of dramatic overvaluation. There is no extension of balance sheets into the stratosphere. The consumer has not concentrated assets in any particular class, as they are still afraid of purchasing real estate and think by touching stocks they will get contract AIDS.
In the meantime technology has recaptured its spot at the top of the market food chain. For the time being, mega-cap technology is creating a disproportionate amount of the gains in the Nasdaq Composite and Nasdaq 100. As investors become less fearful of every dark shadow they will inevitably open up to opportunistic investments with greater upside causing the market breadth groupies to squirm back into their respective holes.
Financials also have stable footing going forward as earnings growth within an increasing rate environment should drive share prices higher over time. Large financial companies have been hell bent on keeping their balance sheets conservative leaving room for increasing earnings growth as confidence prevails.
There are a ton of other factors. I've discussed them before and will continue to discuss them in the months ahead. Secular bull markets don't top on fundamentals, but rather when psychology reaches a euphoric tipping point. There is only misery in this bull market and that's a great thing.
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