Why Is the Put-Call Ratio (Fear Gauge) Higher Than in the Lehman Collapse of 2008?
(October 14, 2014)
The rising fear may reflect a shift in sentiment from faith in the omnipotence of central banks to skepticism.
By at least one well-known measure of sentiment, the level of fear in the stock market now exceeds the fear triggered by the collapse of Lehman Brothers in September 2008. Lehman declared bankruptcy on September 15, 2008, unleashing a cascade that soon threatened to take down the entire global financial system.
There is no comparable event--or level of fear--other than the Great Crash of 1929.
Thus it is extraordinary that yesterday's CBOE put-call ratio of 1.53 exceeded the put-call ratios of the 2008 global financial meltdown, which topped at 1.52.
What is the put-call ratio? Here is the standard definition: The Chicago Board Options Exchange's (CBOE) put/call ratio (or put–call ratio, PCR) is a technical indicator that reflects investors' sentiment. The ratio represents a proportion between all the put options and all the call options purchased on any given day.
Puts are options that increase in value as stocks decline. Calls are options that increase in value as stocks rise. So if punters reckon the market will fall, they buy more puts (bets the market will drop) than calls (bets the market will rise).
There is no one ideal measure of sentiment. Participants buy options to protect or hedge their portfolios as well as to speculate on market moves, so the put-call ratio reflects a wide range of motivations and emotions. Nonetheless, it serves as a rough-and-ready thermometer of participants' fear and panic.
Anyone can download the CBOE put-call ratio data from November 1, 2006 to the present on the CBOE website and display it in an Excel spreadsheet.
If you sort the 2,003 records from highest to the lowest, you find that the only days in that time period where the put-call ratio exceeded the Lehman collapse and yesterday, October 13, 2014, are three days in early 2007, when the first indications that the wheels were coming off the subprime mortgage market and the housing bubble hit the news. (Those three days registered the only PCRs above 1.53: 1.61, 1.65 and 1.68.)
A mere 28 of those 2,003 days registered put-call ratios of 1.40 or higher. Only 12 days registered PCRs of 1.50 or higher. So clearly, the current level of fear is noteworthy.
What has spooked punters to levels not seen since the global financial system was tottering in October 2008? Are the current set of global risks really equivalent to the implosion of the entire global financial system? Punters seem to think so.
Perhaps what is different from 2008 is the constellation of global risks, which now include a deadly viral epidemic (Ebola) and geopolitical conflicts as well as a softening global economy.
The rising fear may reflect a shift in sentiment from faith in the omnipotence of central banks to skepticism. After all, if central banks can't guarantee markets will loft ever higher, then what is keeping them at current levels? The usual answers-- corporate profits and future earnings--are contingent on the global economy, which appears to be rolling over into recession or stagnation--not the ideal set-up for higher future profits.
I also wonder if the current spike in fear also reflects a new skittishness, as if participants are keenly aware the whole contraption is shaky and so they are primed to sprint to the exits now rather than risk being crushed in the mob.
There is some irony in this nervousness, for if central banks hadn't been so
obsessed with levitating markets higher for the past 6 years by hook or by crook (ahem),
perhaps markets wouldn't be so fearful of a collapse.
Get a Job, Build a Real Career and Defy a Bewildering Economy (Kindle, $9.95)(print, $20)
Are you like me?
Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.
And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.
You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.
Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.
So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.
It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.
I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.
"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a
Bewildering Economy. It is rare to find a person with a mind like yours, who can take
a holistic systems view of things without being captured by specific perspectives or
agendas. Your contribution to humanity is much appreciated."
Gordon Long and I discuss The
New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube)
NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
"This guy is THE leading visionary on reality.
He routinely discusses things which no one else has talked about, yet,
turn out to be quite relevant months later."
"You shine a bright and piercing light out into an ever-darkening world."
Or send coins, stamps or quatloos via mail--please request P.O. Box address.
Subscribers ($5/mo) and those who have contributed $50 or more annually (or made multiple contributions totalling $50 or more) receive weekly exclusive Musings Reports via email ($50/year is about 96 cents a week).
Each weekly Musings Report offers six features:
At readers' request, there is also a $10/month option.
What subscribers are saying about the Musings (Musings samples here):
The "unsubscribe" link is for when you find the usual drivel here insufferable.
Dwolla members can subscribe to the Musings Reports with a one-time $50 payment; please email me if you use Dwolla, as Dwolla does not provide me with your email.
The Heroes & Heroines of New Media:
oftwominds.com contributors and subscribers
All content, HTML coding, format design, design elements and images copyright © 2014 Charles Hugh Smith, All global rights reserved in all media, unless otherwise credited or noted.
I am honored if you link to this essay, or print a copy for your own use.
Terms of Service: