Study: small traders are extremely bullish on stocks. A short term bearish sign


Small traders are extremely bullish on the stock market right now. The Small Trader Call Option Ratio looks at the ratio of call options to total options for trades that are under 10 contracts (i.e. small trades).
This is conventionally seen as a contrarian indicator for the stock market. Professionals deem small traders as “dumb money” (a term that I disagree with because nobody is consistently “smart money” or “dumb money”).

  1. The higher the Small Trader Call Buying is, the more bearish professionals deem this indicator to be.
  2. The lower the Small Trader Call Buying is, the more bullish professionals deem this indicator to be.

The Small Trader Call Buying Ratio currently stands at 0.42, the highest level since 2010.
Here’s what happens next to the S&P 500 when the Ratio exceeds 0.41 for the first time in half a year.
*The data is limited from 2000-present.

Click here to download the data in Excel.
Here are the historical cases in detail.
November 12, 2010
The stock market swung sideways for 2 weeks after the Call Buying Ratio became extremely high.

May 11, 2007
The U.S. stock market was very choppy over the next 3 months after this signal came out.

July 29, 2005
The stock market began a 6%+ “small correction” after this signal came out.

December 10, 2004
The stock market went up for 2 weeks before making a 3 week pullback.

January 7, 2000
The stock market was in the middle of a 6%+ “small correction” when this signal came out.

Conclusion

This study is not useful for the medium-long term. Options-related studies are short term market studies.
When small traders are as bullish on stocks as they are today, the stock market usually swings sideways or makes a pullback in the next few weeks. This suggests that the U.S. stock market will face some short term weakness right now.
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