Should You Follow the Smart Money Now?

08/09/2013 6:00 am EST

Focus: STOCKS

Market participants have been jumpy lately, wondering if the stock market’s long-anticipated top has finally arrived, and Frank Zorilla of ZorTrades.com adds more evidence for your consideration.

I follow and track the CBOE, and ISEE option data on a daily basis, like most indicators they are pretty much useless (in my opinion) until they reach extremes or when you start to notice divergences between them.

For a very long time the OEX was and still by many considered the place where “smart money” tipped their hand in what they are doing in the market. Many track the OEX put to call ratio to get a feel for what “smart money” (I use that term lightly) is thinking. Very simply when the ratio is under 1 that means that they are buying more calls than puts, which is bullish because they normally are hedged and the ratio is basically always above 1. When the ratio gets above 2 that is when they are buying 2 puts for every 1 call, which many believe is a warning sign for things to come (bearish). To filter out some of the daily noise you can use the 10-day moving average when tracking these indicators.

chart
6/4/2013-8/7/2013
Click to Enlarge

Many use the CBOE total put to call, equity only put to call, along with the ISEE call to put ratios, as contrary indicators while the OEX is not considered to be one. Based on the recent readings (since the beginning of June) it seems like OEX players are getting more defensive while the rest of the players are finally embracing and accepting this rally. This could mean something, or it can be thrown out with every other indicator that has been no match and useless for this liquidity-driven market. Also, be aware that they’re different ways to slice and dice this data; some use it without disseminating the information and some do.

By Frank Zorilla of ZorTrades.com

Related Articles on STOCKS