A key indicator of bullish sentiment in US equity options has plummeted to its lowest point in nearly four years, mirroring levels seen just before the 2022 bear market, prompting cautionary warnings from market observers.
The five-day moving average of the Cboe equity put-to-call ratio fell to 0.452 last Friday, its lowest reading since March 30, 2022. This signifies that investor demand for call options, which bet on rising prices, is more than double that for protective put options. Mark Arbeter, president of Arbeter Investments, described this reading as "historically very low." While not a definitive sell signal on its own, he noted it is sufficient to warrant increased investor vigilance. He believes this reflects retail investor sentiment becoming overly exuberant, largely fueled by the artificial intelligence frenzy.
Historical Precedent Points to Market Peaks
The last time this metric reached similar lows was during the initial counter-trend rally of the 2022 bear market. An earlier instance occurred around the market peak in late 2021. Both historical precedents were followed by sustained declines in the equity market. Meanwhile, Mandy Xu, head of derivatives market intelligence at Cboe, noted a growing divergence within the market. While the broad-market volatility index, the VIX, has been declining, implied volatility for single stocks has surged significantly, with the spread between the two reaching a record level, revealing heightened internal market dispersion.
Despite these cautionary signals, the bullish momentum has not abated. On Monday, the three major US stock indices—the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite—all closed at fresh record highs. According to data, the S&P 500 has now recorded 23 new all-time closing highs so far this year.
Put/Call Ratio at Four-Year Low
Mark Arbeter pointed out that the 0.452 reading for the five-day moving average implies call option demand is over twice that of put demand, placing it in an extremely low historical range. The 21-day moving average of the ratio also declined, falling to 0.493 last Friday, its lowest level since December 9, 2021. Arbeter suggested that as long as this moving average remains in a downtrend, the market rally could potentially continue, but the trend itself is evidence of overheating.
It is important to note that put options serve both as directional bets on market declines and as portfolio hedges. When investors aggressively buy call options and hedging demand plummets, it often signals that market risk appetite is approaching extreme levels.
Internal Market Divergence Intensifies, Led by AI
Contrasting with the calm surface of the broader market, significant internal divergence is occurring. In a report, Mandy Xu highlighted that single-stock volatility, as measured by the VIXEQ index, approached a one-year high last week, with its spread to the VIX widening to a historical record. This is the latest signal that internal market dispersion has reached extremely high levels over the past two months, with AI-related stocks driving a large portion of the S&P 500's gains.
On Monday, the S&P 500 information technology sector surged approximately 2.5%, providing the core support for the index's new record. Data from FactSet shows that among the index's 11 sectors, only technology and energy closed higher for the day, with most other sectors declining.
The rise in the energy sector was linked to geopolitical tensions. Reports that Iran halted peace talks with the US and sought a complete blockade of the Strait of Hormuz, a critical chokepoint for Middle Eastern oil and gas exports, pushed international oil prices higher. However, former US President Donald Trump responded on social media Monday afternoon, stating that "negotiations with the Islamic Republic of Iran are moving along rapidly."