Is The Highest Equity Put-To-Call Ratio Since S&P 666 An Indication Of A Market Bottom?

Last Friday, the CBOE Equity Put/Call Ratio reached the highest level in the past two and a half years, higher not only than May 2010 when the market plunged on the first Greek bankruptcy, but higher than March 2009 when the S&P hit 666, and lower only than the second week of January 2009. Additionally, while this one off event may be discounted, the 10 Day Moving Average, as shown on the chart below, has now lifted to levels not seen since February 2009. A quite note by Stone McCarthy captures the conventional wisdom on the topic: "Where a 1-day rise in this indicator alerts us to investors temporarily seeking protection against a market decline, an extreme high by the 10-day smoothing line reveals a more comprehensive sentiment buildup that typically proves to be a more reliable contrary indication of a meaningful bottom being NEAR." Perhaps. However, never in the past has the Put/Call ratio been at such levels even despite the multi-trillion backstop of central banks, and worse still, just two weeks in advance of when the Fed will end its daily stimulus program. The is a saying that being contrarian in the face of conventional wisdom is the only sure way to make money. The problem with that saying is that conventional wisdom is quite often actually correct. Furthermore, last time we checked back in January 2009 Greece and Europe were not about to go Chapter 11, nor was a $900 billion asset purchasing program about to end...

More technical observations from SMRA:

The series of recent new highs by this indicator warns that market participants are still in the process of building protection against downside expectations in price. Therefore, the threat of a more cathartic end to the post-05/02/11 price decline remains real. With the benchmark equity index still locked in a C-wave decline (se chart), risk will continue to favor a better test of the all-important 200-day line at 1262.80, the 2011 low (the 03/16 pivot) of 1249.10, rising trend support from the Mar '09 lows near 1239, and, in a worst-case scenario, a 161.8% extension through 1215 as long as 1311.20 remains resistance.

Are options traders actually correct this time? Next Tuesday, which is when the Greek cabinet vote of confidence takes place, may provide a quick answer.