That’s the message from options experts at McMillan Analysis Corp., who today published a note that their computer generated dollar-weighted Put-Call Ratio Sell Signal has been visually confirmed by XLI’s chart (see below):
As you can see above, XLI’s put-call ratio has completely plunged since its highs just before the November election, and is now at the lowest levels we’ve seen in over a year. In essence, this means that bullish options bets on a dollar volume basis have far outweighed those on the bearish side. This kind of imbalance typically ends with a sharp turn in the other direction, and in XLI’s case, could mean a quick and brutal downturn in the short term.
For more on put-call ratio and its value as a contrarian indicator, here’s McMillan’s explanation:
Put-call ratios are useful, sentiment-based, indicators. The put-call ratio is simply the volume of all puts that traded on a given day divided by the volume of calls that traded on that day. The ratio can be calculated for an individual stock, index, or futures underlying contract, or can be aggregated – for example, we often refer to the equity-only put-call ratio, which is the sum of all equity put options divided by all equity call options on any given day. Once the ratios are calculated, a moving average is generally used to smooth them out. We prefer the 21-day moving average for that purpose, although it is certainly acceptable to use moving averages of other lengths.
Put-call ratio is by no means a foolproof indicator, but it is a historically reliable tool for traders to use to identify stocks that are due for short-term corrections. It pays to closely monitor XLI’s share price over the next several sessions as a result.
The The Industrial Select Sector SPDR Fund (NYSE:XLI) was trading at $67.92 per share on Thursday afternoon, up $0.02 (+0.03%). Year-to-date, XLI has gained 9.16%, versus a 8.93% rise in the benchmark S&P 500 index during the same period.