US stock options data flashes a warning signal: The last time this signal appeared was on the eve of the 2022 bear market
- Core Viewpoint: The sentiment indicator for the US stock options market—the Cboe equity put/call ratio—has fallen to a nearly four-year low, aligning with levels seen on the eve of the 2022 bear market's onset. This reflects extreme risk appetite among investors, yet the overall stock market continues to hit new highs, with internal divergence intensifying.
- Key Elements:
- The 5-day moving average of the Cboe equity put/call ratio has dropped to 0.452, a new low since March 2022, indicating that demand for call options is more than double that for put options.
- The 21-day moving average of this indicator has simultaneously fallen to 0.493, a new low since December 2021. Analysts believe the downtrend in the moving averages already signals an overheated market.
- Historical precedents show that this indicator was at similarly low levels during the market top in late 2021 and the rebound peak in the early stages of the 2022 bear market, both of which were followed by sustained declines in stock prices.
- Implied volatility for individual stocks (as measured by the VIXEQ index) is near a one-year high, with its spread relative to the S&P 500 volatility index (VIX) expanding to a record level, reflecting increased divergence within the stock market.
- The S&P 500 hit another all-time high on Monday, recording its 23rd closing high of the year. However, only the technology and energy sectors among the 11 major sectors closed in positive territory, with the rally heavily dependent on AI concept stocks.
Original author: Zhang Yaqi
Original source: Wall Street News
The bullish sentiment in the US stock market has spilled over into the options market, with a key indicator dropping to its lowest level in nearly four years, highly consistent with levels seen just before the 2022 bear market began, prompting cautious warnings from market participants.
According to Dow Jones Market Data, the five-day moving average of the Cboe equity put-to-call ratio fell to 0.452 last Friday, the lowest since March 30, 2022, indicating that investor demand for call options is more than double that for put options.
Mark Arbeter, President of Arbeter Investments, told MarketWatch that this reading is "extremely low from a historical perspective." While it is not yet a direct sell signal, it is sufficient to raise investor vigilance. He believes this reflects that retail investor sentiment has become excessively euphoric, driven by the artificial intelligence boom.
The previous time this indicator touched a similar level was during the peak of the initial rebound in the 2022 bear market; an earlier instance occurred around the market top at the end of 2021. Both historical precedents were followed by sustained downturns in the stock market.
Meanwhile, Mandy Xu, Head of Derivatives Market Intelligence at Cboe, pointed out that although the overall market volatility indicator VIX continues to decline, the implied volatility of individual stocks has surged significantly. The spread between them has expanded to an all-time high, revealing a high degree of divergence within the stock market.
However, amidst the warning signals, the bullish momentum remains unabated. On Monday, the three major benchmark indices—the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite—all closed at new all-time highs. According to Dow Jones Market Data, the S&P 500 has recorded 23 all-time closing highs so far this year.
Put/Call Ratio Hits Four-Year Low
The five-day moving average of the Cboe equity put-to-call ratio closed at 0.452 on Friday, the lowest since March 30, 2022. Mark Arbeter noted that this figure means investor demand for call options is more than double that for put options, placing it in an extremely low range within the historical context.
The 21-day moving average of this indicator is also trending downward, falling to 0.493 on Friday, the lowest since December 9, 2021 (when it was 0.490). Mark Arbeter stated that as long as this moving average remains in a "downtrend," the stock market might have further room to rise, but the trend itself is evidence of an overheated market.
Notably, put options can serve both as directional tools for betting on a market decline and as portfolio hedges. When investors aggressively buy call options and hedging demand plummets, it often signals that market risk appetite has approached extreme levels.
Historical Precedent Points to 2022 Bear Market Eve
Examining history, Mark Arbeter found that the last time the five-day moving average touched a similar level was during the first "counter-trend rally" of the 2022 bear market; further back, a comparable reading also appeared during the market-top formation phase at the end of 2021.
"We saw these levels when the market was topping out heading into the 2022 bear market," he said.
Following both of these historical turning points, the US stock market entered sustained downward cycles, providing a reference for the warning signal conveyed by the current indicator. Mark Arbeter also emphasized that this does not constitute a clear sell trigger, but historical experience is sufficient to make investors exercise restraint when chasing gains.
Stock Market Divergence Intensifies, AI Concepts Dominate Gains
In contrast to the overall market's placid appearance, significant divergence is occurring beneath the surface. Mandy Xu noted in a report released on Monday that single-stock volatility, as measured by the VIXEQ index, has neared a one-year high. The spread between it and the VIX has expanded to a record high.
This is the latest signal that internal divergence within the stock market has risen to extremely high levels over the past two months – with AI-related stocks dominating the bulk of the S&P 500's gains.
On Monday, the S&P 500 Information Technology sector surged approximately 2.5%, becoming the core support for the index's record closing high. FactSet data shows that among all 11 sectors of the index, only Technology and Energy ended the day in positive territory, while most other sectors declined.
The rise in the Energy sector is related to geopolitical disturbances. According to reports, Iran has suspended peace talks with the US and is seeking a complete blockade of the Strait of Hormuz – a key waterway for oil and gas exports from the Middle East – pushing international oil prices higher.
However, US President Donald Trump responded on social media on Monday afternoon, stating that "Talks are progressing rapidly with the Islamic Republic of Iran."
