A Key Signal That Suggests a Choppy Market Ahead
Sentiment is the most overlooked piece of stock market prognostication, with the possible exception of perspective.
When sentiment turns too bullish, upside is limited. When it turns too pessimistic, go all in. If you adhere to that one simple strategy and follow the Cboe Options Equity Put/Call Ratio ($CPCE), you'll likely change your stock market investing success for the better.
Below is a chart that I include in my Weekly Market Report with EarningsBeats.com members every week. While I don't think it's necessary to review it once a week, it's a good idea to keep it on your radar just to gauge sentiment as it changes.
On the above chart, any time the 253-day SMA of the CPCE moves down to 0.60 or below, potential stock market upside begins to take a hit. Readings at this low level tell us that retail options traders are skewing their purchases way too far to the bullish side, which typically does not end well. However, as this key moving average moves closer to 0.70 or above it, it's an indication that retail options traders are growing excessively bearish. This pessimistic attitude generally launches the S&P 500 to outsized gains for an extended period of time.
The problem currently is that the 253-day SMA of the CPCE just bottomed at 0.57 and is now trending up. This is just one signal but, historically, it's hard to argue with the its accuracy. It doesn't mean we've started a bear market, though that is certainly possible, but it suggests a period of higher-than-usual volatility and likely whipsaw action. It's going to be difficult to trust either bullish or bearish moves and, if you're someone who tends to chase moves, 2026 could be a very, very frustrating and difficult year.
I expect the balance of 2026 to be a "stock pickers" year. Don't be afraid to book profits after a solid trade and then stockpile cash for later trades. I'm looking for new all-time highs later this year or in 2027, so I plan to simply accumulate ETFs that track our major indices during periods of weakness; in fact, I've already begun to do just that.
Nearly everyone on the planet struggles at calling major market tops and bottoms. But market guidance is our expertise. I've been on record publicly calling significant tops and bottoms. One of my best calls was calling for a cyclical bear market at the start of 2022 during our MarketVision 2022 on the first Saturday in January that year. The 253-day SMA of the CPCE was perhaps my biggest reason for making that call. I told everyone at MarketVision that sentiment was the market's biggest problem heading into 2022. The pandemic had created a whole new flock of investors, many of which began investing when the market recovered solidly off of the panicked lows in March 2020. By the time January 2022 had arrived, the S&P 500 had gained an astonishing 115% in 22 months. That's unsustainable and the CPCE reached complacency levels it had never seen before. It was an easy call, yet everyone thought I was crazy. "How dare you suggest our ATM was closing!"
Sentiment and perspective can take you a long way in this business.
Seasonality also provides us helpful hints along the way. Many stocks perform better during the month of April. On Monday, I'm sending our free EB Digest newsletter subscribers an energy stock that has risen 85% of Aprils over the past two decades (17 of 20 years) and has averaged gaining more than 6% per April. It also just happens to be consolidating right now on its 20-day EMA, set up for another advance. The bullish seasonality only adds to the odds of a successful trade.
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Happy trading!
Tom
