Chart of the Day - Friday, February 28th, 2020

Today’s Chart of the Day was shared on Twitter by Adrian (@highlevelTrader). It's a chart of the S&P 500 going back to the 2009 lows. The blue indicator on top is a 5-day moving average of the CBOE put/call ratio. This indicator is used to gauge short-term sentiment in the S&P 500. When traders purchase more protective puts than calls, the ratio spikes higher, signaling fear among market participants. On the other hand, when traders buy more speculative calls than puts, the ratio falls, indicating optimism among market participants. Like most sentiment indicators, the put/call ratio is most useful when it's at an extreme. Prior to this week's sell-off, several technicians warned that the market was due for a pullback because the put/call ratio was extremely low. The ratio has now jumped to 1.276 amid this week's bloodbath. The green vertical lines mark the instances where the put/call ratio spiked above 1.2. As Adrian points out, readings above 1.2 are often found near bottoms. This is evidence that stocks may be due for a bounce in the near-term. As Warren Buffett once famously said, “Be fearful when others are greedy and greedy when others are fearful.”