Wary of Chasing the Rally

The index put/call ratio once again chimed in with a reading under 100%. I was really surprised at this since it's not as though we spent most of Tuesday on the upside. Sure, we were on the upside early in the morning, but we gave that back and then some in the early afternoon.

Despite this oddity I went back to find other times the index put/call ratio had two or more days in a row that were under 100%. It probably won't surprise you to know that the examples I found didn't occur in bear markets. I did find a period of four days in December 2005 where this ratio couldn't get itself up over 100%. From Dec. 12, 2005, to Dec. 15, 2005, we had readings under 100%. It is marked with a red box on the chart.

You will note that we spent the next two weeks heading downward from about 1275 to 1245, or 2%. I know folks are likely laughing at me for even discussing a 2% correction in the market as a comparison, but back then a move from 1275 to 1245 wiped out the whole month's gains.

Also on the chart you'll see I've drawn a blue arrow. That represents the second day of a two-day string of readings under 100% -- Feb. 15-16, 2006. If you squint hard enough you can see we actually went down the next two days and then back up. However, one week after those readings we did fall from 1298 to 1270, or another 2%.

In the December 2005 decline you will notice there was basically one day with a decline of 25 points. In February 2006, the bulk of the decline was about two and a half days. So both times they were short-term whacks.

We have a seasonality factor in the market right now. First, we have the day before and the day after Thanksgiving which are seasonally up days. They also turn out to be the final trading days of the month.

Followed these days are the seasonally up first days of the month. And that all coordinates with the oversold nature that is still evident in the market.

So I won't say I think we can get a whack in the next few trading days since the seasonality factors are stacked against it, but it is hard to find a time where we had such low index put/call ratios and the market just kept marching higher. Keep in mind it took almost a week for the market to react to the low ratio in late October as well.

This does not make me bearish. It makes me not want to chase the rally up here. In fact, I even have some indicators that are lining up much more positively if we can get Nasdaq to come down a bit more relative to the S&P 500 . I'll show you that next week. But as long as this index put/call ratio is so low, I feel I need to see a whack of some sort since this indicator doesn't say there is a wall of worry out there.

Note: I'm taking a few days off for the holiday, so my next column will be Monday, Dec. 1. Happy Thanksgiving to all!

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Know What You Own: Meisler mentioned the S&P 500. Some companies in the index include ExxonMobil (XOM - commentary - Cramer's Take), Procter & Gamble (PG - commentary - Cramer's Take), General Electric (GE - commentary - Cramer's Take), Johnson & Johnson (JNJ - commentary - Cramer's Take), AT&T (T - commentary - Cramer's Take), Chevron (CVX - commentary - Cramer's Take), and Microsoft (MSFT - commentary - Cramer's Take).

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At the time of publication, Meisler had no positions in any stocks mentioned, although holdings can change at any time.

Helene Meisler writes a daily technical analysis column and TheStreet.com Top Stocks. For more information, click here. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.