That’s the message from the options experts at McMillan Analysis Corp., who today published a note that their computer generated Put-Call Ratio Buy Signal has been visually confirmed by EPI’s chart (see below):
As you can see above, the put-call ratio (blue line) surged recently toward all-time highs. In essence, this means that bearish options bets on a volume basis are dwarfing those on the bullish side.
This sort of severe imbalance typically ends with a sharp turn in the other direction, and in EPI’s case, could mean a quick rally in the short term.
For more on put-call ratio and its value as a contrarian indicator, check out 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.
While a surging put-call ratio is by no means a guarantee that an ETF will rise, it is a historically reliable tool for traders and investors to use to identify ETFs that are due for short-term jumps (or pullbacks). It pays to closely monitor EPI’s share price over the next several sessions as a result.
The WisdomTree India Earnings Fund ETF (NYSE:EPI) was trading at $26.11 per share on Thursday afternoon, up $0.11 (+0.42%). Year-to-date, EPI has gained 29.95%, versus a 10.46% rise in the benchmark S&P 500 index during the same period.