EB Special Report - Friday, May 13, 2022

Just a quick heads up that the 5-day moving average of the equity only put call ratio ($CPCE) hit .76 at yesterday's close. Every market bottom over the past 20 years has hit a 5-day moving average reading of at least .75. So the "sentiment reset" that I discussed at the beginning of 2022 that I believed was necessary to enable us to bottom and then launch higher later in 2022 has now been accomplished.

Let me say that this in NO WAY guarantees us that a bottom is in place. But we've at least reached a point where major bottoms have formed. 15 of the 18 MAJOR market bottoms this century have occurred with the 5-day moving average of the CPCE at .80 or above. We didn't hit that level, so it's very possible that we have one more low ahead. But I wouldn't be surprised to see an extended rally here. I sent out a Special Report on Tuesday, detailing the increasing fear in the market. You can see from the extreme volatility the past three days how difficult it is to time an exact bottom. Again, there's no guarantee that this rally doesn't fail just like the Tuesday/Wednesday attempt. But you should at least be aware of the sentiment changes taking place in the market.

Here's the long-term chart showing all of the key market bottoms and the 5-day moving average of the CPCE at the bottom:

I've noticed the equity only put call ratio at the cboe.com is higher than the readings reported by StockCharts.com. I'm not sure why, but I'll try to find out. At the cboe.com yesterday, I saw the half hour reading at 1pm ET hit 2.61, which is unbelievably high. That may have at least been the short-term signal that bulls were "throwing in the towel."

Here were the readings that I've recorded on my Excel spreadsheet:

The next-to-last column to the right shows the individual half hour readings. For instance, the 2.61 reading at 1pm was derived with the following formula: (1,352,547-1,106,471)/(1,228,857-1,134,481). I take the cumulative puts at 1pm and subtract the cumulative puts at 12:30pm. I do the same for calls, then divide that 1/2 hour number of puts by the 1/2 hour number of calls. Someone had sent me an email earlier this week to explain the calculation, so there you go.

Anyhow, I wanted to make all of our members aware of the sentiment changes that have taken place.

It doesn't hurt that the S&P 500 has broken out of its recent down channel either:

Note that both ratios at the bottom support this move to the upside - at least for now.

Happy trading!

Tom