Pull the trigger with confidence.

Tuesday’s CBOE Put/Call Volume Ratio was at a really low level of 0.684, the lowest we have seen since the highs in early January.  A low Put/Call Ratio means that options traders are comparatively more interested in trading calls than puts.  Calls involve a bet on higher prices, while puts bet on lower prices.  So a low reading like this means that traders are not particularly worried about the risk of a decline, and that thus we all should be. 

People have decided that things are getting better.  And things just might actually be getting better, but it is a problem for investors when people start thinking that things are better.  The reason is that the money is made in the stock market when sentiment is moving from horrible to great.  Once people are happy, it is tougher to make them more happy. 

We have recently seen reports calling the January 2010 Summation Index high a “major divergence”, since it was lower than the prior high made on Sep. 22, 2009.  It is true that this is a divergence, since the price high was higher and the Summation Index high was lower, but the interpretive implications are not as dire as one might think.