At all costs, ignore the herd.
It’s not rational. It never has been. And it never will be.
The herd is simply driven by extreme forces of fear and greed… Stocks get too high because of it. Stocks get crushed because of it, too.
But if you can spot the extremes, you put yourself ahead of the game.
One of the best ways to spot irrational fear is with the put-call ratio – a contrarian options trader’s greatest tools. Well… next to a good grasp of technical pivot points, as we’ve long discussed.
But when it comes to the put-call ratio, or PCR, traders have used it for years as an indicator of potential swings. You buy puts if you think a stock will come down. You buy calls if you think the stock will move higher.
It’s only logical to believe that if the ratio of a put and call on a stock becomes abnormally high on one side, something may be happening behind the scenes.
If the puts — for example — far outweigh the number of calls, or if calls far outweigh puts, we’re attracted to the herd-like potential. It’s the equivalent of a ‘poker tell’ that allows us to pick up on potential reversal based on a high level of fear.
Elevated Fear
Put/Call Ratio above 0.9 tells us put buying is rising and that traders are becoming defensive.
Emotional Extreme (Panic)
Put/Call Ratio above 1.00 to 1.10 tell us there are more puts than calls. Fear is growing. Historically, these levels tend to appear after sharp selloffs. At this stage selling pressure is often closer to exhaustion, and downside bets become crowded.
The put-call ratio is a contrarian trader’s greatest tool. And it does a better job of calling bottoms than tops in most cases. Take a look at Apple for example.
The red arrows highlight where PCR spiked.
Fear began to mount, and became overdone, leading to opportunity.
Read in Behind the Markets: WARNING: $7 TRILLION Event Imminent. Most Americans Unprepared
This isn't a boom where everyone wins. It's a transfer from one group to another—like railroads (1800s) and internet (1990s). Louis Navellier, who spent 46 yrs on Wall St., built the grading system institutions paid $24,000/yr for him to evaluate stocks with. Now, his system shows exactly where the $7 trillion is flowing. And it's not AI.
Found this helpful? Share it with others.
Written by Ian Cooper