This market-timing strategy uses the put/call ratio as an indicator to predict future stock market return. In this strategy, stocks are supposed to be sold when the indicator falls below the predefinded threshold value, and vice versa. It also has “delay day” and “waiting day” settings.
Much of the data used in tracking market sentiment is derived from the options market. One of them is the put/call ratio, defined as the trading volume of puts (or number of puts outstanding) relative to the trading volume of calls (or number of calls outstanding). It is widely used by analysts to measure the sentiment in the options market. That is, when the put/call ratio is high (a high number of puts being traded relative to the number of call options being traded), the market is highly pessimistic and a turnaround with an increase in stock prices is expected. On the contrary, a low put/call ratio indicates that the market is overly optimistic and is expected to adjust downwards.
So for the Put/Call ratio, rising above a certain threshold is considered to be a switch signal from holding cash to investing in S&P 500 Index, and vice versa. If the same switch signal persists for “delay days”, we switch the trading position. And in the succeeding “waiting days” we keep the position ignoring the new switch signals. The signals are examined every month.
Threshold can be certain fix values or SMA (Simple moving average) of certain days. For the moment, Our database has Chicago Board Options Exchange (CBOE) daily exchange put-call ratios, include index exchange put-call ratio (CBOE-I), equity exchange put-call ratio (CBOE-E) and total exchange put-call ratio (CBOE-T).
Parameters used in the created portfolio:
Indicator: Put/Call ratio
Threshold: 0.7, 0.8, SMA 30days (default) , SMA 120days
Waiting days: 1 day, 5 days (default)
Delay days: 1 day, 5 days (default)
BuySecurity: ^GSPC (default)
Put/Call ratio : CBOE-E (default, Chicago Board Options equity exchange put-call ratio) , CBOE-I(Chicago Board Options index exchange put-call ratio), CBOE-T(Chicago Board Options total exchange put-call ratio)
Similar Strategies in ValiFi:
- Market Timing Rule with Short Term Interest Rate: using the short-term interest rates as an indicator
- Market Timing Rule with Maturity Spread: using the spread of long-term and short-term interest rates as an indicator
- SMA Timing Method proposed by Faber: using the SMA of the target asset as an indicator
- High Yield Bond Timing Strategy: using trend triggers (percentages from recent high or recent low) of the asset price for buy and sell decisions
- The 125 05 Timing Model of High Yield Bond Strategy by Gerald Appel: using predifined trend triggers (percentages from recent high or recent low) of the asset price for buy and sell decisions
- Market Timing Rule with Long Term Interest Rate: using long-term interest rate as an indicator
- Market Timing Rule with Earning to Price Ratio: using the E/P ratio as an indicator
- Market Timing Rule with Dividend Yield: using the dividend yield as an indicator
- Market Timing Rule with Expected Inflation: using the expected inflation as an indicator
- Market Timing rule with Implied Volatility Index : using the implied volatility index as an indicator
- Market Timing Rule with Bond-Equity Yield Ratio : using the bond-equity yield ratio as an indicator
- Market Timing Rule with Dividend Payout Ratio : using the dividend payout ratio as an indicator
- Market Timing Rule with Credit Spread : using the credit spread as an indicator
- Learning Market Timing Rule: following the most profitable rule of the above simple market rules in each period
- Voting Market Timing Rule : Switching the position if a certain percentage of the above simple market timing rules intends to do so.
See Also
Relative Working Papers:
- Neuhierl, Andreas,Schlusche and Bernd. Data Snooping and Market-Timing Rule Performance. 2009.
-
Guru Grades. Does the CBOE Put-Call Ratio Really Work? 2007.
Relative books:
- Deborah Weir. Timing the Market: How To Profit in the Stock Market Using the Yield Curve, Technical Analysis, and Cultural Indicators . 2000.
- Les Masonson. All About Market Timing: A Easy Way To Get Started. 2003.
- Colin Alexander. Streetsmart Guide to Timing the Stock Market: When to Buy, Sell, and Sell Short. 2005.