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2 MORE Signs of an Epic Financial Complacency

Here’s what the put/call ratio reveals about investor sentiment

by Bob Stokes
Updated: December 27, 2019

As we approach the end of 2019, the longest bull market in history is still in place (started March 2009).

Moreover (CNBC, Dec. 19):

For the first time ever, the U.S. economy started and ended an entire decade without entering a recession.

Topping it all off, many investors are as snug as a bug in a rug when it comes to the stock market.

For example, as we recently noted in these pages, one high-ranking bank economist suggested that stock investors should "back up the truck and buy, buy, buy."

Now, let's mention two more signs of an epic financial complacency.

The first sign was discussed in our Dec. 18 U.S. Short Term Update:

CBOETotal

The chart (courtesy of SentimentTrader.com) shows the daily CBOE Total Put/Call Ratio under the Dow Jones Industrial Average. The put/call ratio divides the total volume of puts (option bets against rising equity prices) purchased on individual equities and indices on the Chicago Board of Options Exchange by total volume of calls (bullish bets). When the ratio is low it means the bulls are dominating the speculation in options. Yesterday's reading was .63, the lowest in three years. As the red line on the chart shows, it is even lower than the last extreme on the chart, a .64 reading on January 23, 2018.

The second sign of a significant financial complacency was the focus of a Dec. 24 Wall Street Journal article:

Buyers Return to Riskiest Junk Bonds

Prudent investors usually steer clear of the debt of companies with the weakest balance sheets. So, when such debt is enthusiastically embraced, it's a major sign of financial complacency.

"OK -- investors are complacent -- so what?", you may ask.

Well, financial history shows that periods of extreme financial complacency are followed by extreme volatility.

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