An extremely rare signal flashed across the stock market on Tuesday, suggesting big gains ahead.
That’s according to Fundstrat’s Tom Lee, who highlighted a rise in the put-to-call ratio despite a jump in the S&P 500.
Since 1997, there have only been three instances where the put-to-call ratio has risen above 1.0 on the same day that the stock has jumped 1%.
An extremely rare contrarian signal appeared in the stock market on Tuesday and suggests strong gains ahead, Fundstrat’s Tom Lee said in a Wednesday note.
Lee noted that the put-to-call ratio rose above 1.0 on Tuesday, the same day the S&P 500 rose more than 1%. This is a headache because the put-to-call ratio typically rises on stock market down days, not on days of strong gains.
The put-to-call ratio is a technical indicator that helps measure investor sentiment. A measure of 1 for the put-to-call ratio indicates that the number of buyers of bullish call options equals the number of buyers of bearish put options. A measure greater than 1 for the ratio signals that there are more put buyers than call buyers, suggesting that investors are biased more to the downside than to the upside of the stock market.
“A surge [the] The CBOE put-to-call ratio usually occurs on a down day. It makes sense: markets fall, investors try to hedge, [so they] buy puts,” Lee said. The put-to-call ratio jumped from 0.64 to 1.35 on Tuesday, according to data from YCharts. Meanwhile, the S&P 500 was up nearly 1.4%.
According to Fundstrat, since 1997, there have only been three other instances where the put-to-call ratio rose above 1 on the same day that the S&P 500 rose more than 1%.
“The forward returns for the stock are very good,” Lee said of those three dates.
Such instances include February 1997, November 2008, and March 2020. All three dates saw significant upward movements in the stock market over the coming months and years.
According to Lee, the S&P 500 produced average forward returns of 3.7%, 17.5% and 35.8% over the next three, six and twelve months, respectively, with a win ratio of 100% for positive forwards over six and twelve months. month returns.
That, combined with year-end seasonal strengths, gives Lee confidence that the S&P 500 could rise to 4,500, or about 12% from current levels, by the end of the year.
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