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Bearish Options May Bode Well for S&P 500: Technical Analysis

Bearish options outnumbered bullish bets by the widest margin since the Standard & Poor’s 500 Index made its bottom this year, a sign that U.S. stocks may be due for a rebound, according to Birinyi Associates Inc.

The ratio of puts to calls on U.S. indexes increased to 1.15 on May 17, the highest in two months. Since the S&P 500 began its rally from a 12-year low in March 2009, the options ratio had risen or stayed above that level on five occasions analyzed by Kevin Pleines, an analyst with Westport, Connecticut-based Birinyi, who found that four of those times the market was higher a month later.

“Historic precedence in this bull market suggests this might signal the end of a pullback,” Pleines said in an interview. “This bearish indictor has been a positive signal for the market.”

The S&P 500 has slipped 1.7 percent from an almost three-year high on April 29 amid concern that Greece may have to restructure its debt and as economic data on housing and industrial production damped optimism about the U.S. recovery. A Citigroup Inc. index tracking economic reports compared with analyst estimates turned negative this month for the first time since December, after reaching a record-high 97.5 in March.

Contrarian Indicator

A rising ratio of puts to calls shows traders are becoming more pessimistic, a positive sign to some analysts who view sentiment as a contrarian indicator. More pessimism suggests the shares are likely to rise because bearish investors may have sold their holdings and would have to buy to get back in. Calls convey the right, without the obligation, to buy a security at a set price by a given date, while puts give investors the right to sell.

The S&P 500 resumed its two-year rally on March 16, when the ratio of puts to calls jumped to 1.17, the highest level since September 2010. The benchmark advanced 5 percent in the following month.

Technical analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

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