A reading over 1.0 indicates bearishness in the market, because a high level of put-buying indicates a rising level of fear. That, of course, is bullish if you're a contrarian betting against sentiment.
The 21-day moving average on the put-to-call ratio read 0.57 at last Friday's close. At the start of the rally back in the first week of March, the daily put-to-call ratio ranged from 0.75 to 0.93.
"Typically, traders like to see the put/call hit 1.5 or higher to get an oversold signal," says Smith. "But on a big down day, such as a market crash, it can hit extreme readings of 4 or greater. On the other hand, a reading of 0.50 or below indicates a high level of bullishness. So contrarians might think the market top is at hand and start selling."
Mutual Fund Inflows
Although the mutual fund industry might have lost its moorings recently, it still pays to watch the flow of funds into the largest ship on the financial sea.Arcata, Calif.-based AMG Data Services provides information on mutual fund money flow and holdings data every Thursday at 7 p.m. New York time. In order to provide this data, AMG collects and verifies data from more than 500 sources on 16,900 open-end mutual funds with total assets of about $6.3 trillion. AMG updates mutual fund holdings reports as they are filed with the Securities and Exchange Commission. Last week, AMG announced that U.S. stock and mutual funds extended their streak of positive weekly flows to seven, with investors shoveling $1.3 billion into stock funds for the period ending Dec. 23. About 58% of the flows went into domestic stock funds. For contrarians looking for a trend, the flows were smaller than the $1.9 billion that the stock funds took in during the prior week. At the beginning of the market's climb, AMG reported equity fund outflows -- not inflows -- of $3.7 billion for the week ending March 5, 2003.