Tuesday, September 26, 2006

XAU put/call ratio

Put/Call ratio is one of those contrarian indicators that are based on what people actually do with their money as opposed to what they say how they feel about the market. However, the generic put/call ratio chart readily available from StockCharts.com is not specific enough for gauging sentiment in any particular sector. So far as the precious metals complex is concerned, options on the XAU (Philadelphia gold and silver index) ought to be more revealing. I have been tracking this great resource at the Small Investor Software Company. The most recent chart is shown below with some annotation. It can be seen that since December of last year, large spikes in the P/C ratio (red circles) above 3 (green line) has immediately preceded or coincided with notable bottoms in the XAU. [I have no way of knowing whether these are naked positions or part of a hedge. I’m simply pointing out the correlation here.] The largest spike, absolutely towering above the other data points, was generated by the June bottom in the PM indices. More recent spikes to a P/C ratio around 3, however, only produced short term bottoms in the ascending triangle that failed spectacularly, much to my chagrin. The most recent peak on 9/22 must be viewed in that context.

So far this indicator seems to be working as the HUI picked up 3% to end at 300 today. I’m not basing any trading decisions on this information, but taken together with the more bearish articles currently circulating (here and here), some much needed fear may be creeping into the hearts of PM investors finally.