With the recent market volatility in wake of the news from Japan, stocks were fittingly green yesterday on St. Patrick’s Day. Technically speaking, we have noticed an increased level of put (bets on market going down) vs. call (bets on market going up) activity since the end of 2010. The Chicago Board Options Exchange 5-day put/call ratio has shown an increase in put volume relative to call volume. This would suggest that investors are becoming more cautious as the US equity market reached new recovery highs earlier this year. With recent global uncertainties leading to a deeper correction for US equities in the past few weeks, the 5-day put/call ratio has already begun to move even higher indicating an increasing amount of pessimism about US markets. An higher number indicates higher put volumes relative to call volumes. From a contrarian point of view, the put/call ratio is becoming more bullish. However, based on recent history, increased volatility, as well as uncertainty in Japan and Middle East, deeper oversold levels for this indicator shouldn’t be ruled out. If stock prices continue to move lower along with the put/call ratio rising and investment sentiment becoming more negative, it could set the stage for higher stock prices.
On the economic data front, new applications for unemployment benefits fell by 16,000 last week to 385,000, keeping initial claims at a level usually associated with a modest pace of hiring. Continuing claims also decreased as the unemployed either found jobs or are no longer receiving benefits. At the same time, the Labor Department reported that U.S. consumer prices, (inflation) rose 0.5% in February, mostly fueled by higher gasoline costs. So-called core prices, which strip out the volatile food and energy categories, rose a lesser 0.2%. A variety of economists had forecast this figure to rise 0.5% overall, with a 0.1% increase in the core rate. Consumer prices have risen an unadjusted 2.1% over the last 12 months, though a smaller 1.1% on a core basis. So all things considered, if you strip out the cost of gas and food, things don’t appear to be so bad. Unfortunately, those two things alone weigh heavy on the consumers’ pockets and their ability to spend. We shall see soon enough.
