Nifty Stock-Market Timing Indicator

No indicator works all the time in predicting stock market corrections. But some work better than others, and this obscure indicator from Yong Pan at has a high percentage success rate. The indicator is the Percentage Price Oscillator (PPO) of the relative movement of the equal-weighted S&P500 index (normally the S&P 500 index is a market-capitalization weighted average) versus the Chicago Board Options Exchange (CBOE) options equity put/call ratio.

In the chart above, when the blue indicator line crosses below the zero boundary, a sell signal is generated.

Intuitively, the indicator makes sense. First of all, the put/call ratio serves as a reasonable real-time measure of complacency and fear in the market. When investors are fearful, they load up on put options for protection, sending the put/call ratio higher, and when they are complacent, they buy less puts and the put/call ratio drops. The indicator line displays the PPO (a measure similar to the rate of change) of the relative movement of the equal-weighted S&P 500 index (the numerator) and the put/call ratio (denominator). When the market begins a new downtrend, the numerator falls and the denominator rises, so the PPO heads down. The interesting point is that the indicator has worked for a long time through various market environments. The data I have starts in 2004, so it has worked for at least eight years.


About jstradingnotes

I spend a lot of time analyzing the economy and securities. The effort has enabled me to generate multi-thousand percent returns on my trading capital over the past twelve years. The next few years offer an incredible opportunity to take outsized gains from the markets. Large structural imbalances in the major western economies will result in enormous market volatility as the imbalances get resolved, offering generational money-making opportunities. The major imbalances are excessive sovereign debt, crazy risk concentration in major banks, and enormous derivative exposure in the financial sector. A systemic shock can easily create a default cascade through the financial system where one failure precipitates another and another and so on. Central banks are very aware of the risks, and they are filling the financial system with liquidity by printing new money, risking massive inflation in a few short years for the United States and Europe. China has 2-3 trillion in dollar exposure, and they would like to have far less for fear of continued currency devaluation (they've lost billions holding dollars as the value erodes). As the size of their holdings prevent them from rapidly liquidating their dollar assets (which includes U.S. treasuries), they are instead spending their dollars on resources (copper mines, rare earth metal mines, oil wells, etc.). Lately they have been accumulating gold assets, perhaps with a view to making the Renminbi convertible into gold and displacing the U.S. dollar as the international reserve currency. Their gold buying is enormous and presents an easy investment thesis: ride the Chinese horse and buy gold and gold stocks. In this blog, I'd like to share some of my trading ideas and insights on the markets as these exciting times unfold.
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