Monday was a key and pivotal day in the stock market for a variety of reasons.
- The S&P officially closing in bear market territory
- New 2022 lows in the S&P, Nasdaq, & the Dow
- Tesla (TSLA) fell by -7.01% in the first cash session after announcing their next 3:1 split
- Microsoft (MSFT), Apple (AAPL), and Meta Platforms (META) all making new lows on the year
- Semiconductors breaking, with the Vaneck Semiconductor ETF (SMH) closing down -5.56%
- Bitcoin falling by -20% in a session
- The 10-year treasury index (TNX) closed up +6.65%, to a new high not seen since 2011
- Speculation that the Fed will raise rates by an unprecedented .75 basis points at their upcoming, Wednesday FOMC meeting
All of these factors were historical, but one in particular certainly caught my eye. What could that have been?
It was the put/call ratio. The put/call ratio is a critical market internal that demonstrates how many put buyers versus call buyers are out there. When the ratio gets skewed to one direction or another, it means that market participants are too heavily slanted in one direction or another. When sentiment gets too strong in one direction, it inevitably leads to a swift move in the opposite direction.
Check out the chart below, in which I compare the SPDR S&P 500 ETF (SPY) versus the put/call ratio on a daily timeframe, going back to February of 2020.
Charles Payne & I discussed what this means for the market, along with some key setups I’m watching coming up soon, yesterday on his show on Fox Business. Learn more on the link below!
"Right now the put-call ratio is incredibly high, which means we need to be ready for a massive short squeeze at any moment."
— Simpler Trading (@simplertrading) June 13, 2022
Now, I love joining Charles, and he’s been one of the first to point out the many times in which the put/call got high enough for a squeeze! I love chatting with Charles and hashing out key ideas, but I wanted to give you one more video as well…
Want more information on how to trade it?
The key to the put/call ratio is that you can’t just simply ‘buy calls’ because the ratio is extremely high. Yes, the put/call is at extreme highs, and as of Monday, June 13th, it closed at 1.26. But, this doesn’t mean that is the high, and we are destined to rip higher right here and now.
The put/call ratio can remain high. Just look at February, and March, of 2020. The put/call was extended above 1.0 for almost 3 weeks. Yes, there were intraday spikes where it came down or even came down for a day or two. But, it immediately spiked back up, again, as the market continued to fall. It only eventually topped out at 1.71, a full half-point higher than where we are right now.
That means that the put/call just tells you that the situation exists in which a squeeze could happen, but it doesn’t mean it will.
There has to be a catalyst. The most obvious one this week is the Fed meeting. Now, everyone is forecasting total gloom and doom, so there is a small chance it won’t be completely awful and the Fed could send off a relief rally turned short squeeze. It’s happened more than once! Is my conviction strong enough that this could happen, that I’d consider buying pre-Fed? NO!
This is how I’m playing it…
Be on the lookout for the #shortsqueeze.
I'm not buying yet, and I won't until I see signs it's actually coming through. What will those look like?
— Danielle Shay (@traderDanielle) June 14, 2022
One more thing…
A special thank you to everyone who joined me in my class, Diamonds in the Rough! We shorted Amazon (AMZN), Disney (DIS) the Nasdaq (QQQ), and the semiconductor (SMH), making enough to pay for the class. All trades were in and out in 4 days or less. Want to catch the next live trading session?
Join me in my Stacked Profits Mastery program, where I have a live session most Tuesdays!