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Investors were fairly bullish on the tech and auto sectors

At the end of last year we discussed the put / call ratio of Equity Buy-to-Open (BTO) extremely low valueswhen investors went on a buying spree. Assuming the BTO volume is not hedged, a low ratio would indicate a lot of optimism. The data showed that an extremely low ratio tends to have bearish effects, making it a good contrary indicator.

This indicator obviously failed at the end of 2020, but the BTO put / call ratio remains at a particularly low level. The second chart below shows that call buying has fallen since the start of the year but is still historically high, especially when compared to put buying. This week I’ll be updating those numbers and breaking the ratio by sector to see exactly which sectors are the most bullish of investors.

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Extreme compare extremes

When I looked at these numbers a few months ago, the extremely low numbers were followed by significant underperformance. Since then, the market has been so strong that this trend no longer applies. So I went back to 2010 and found the lowest 15% of the readings and then compared them to the highest 15% of the readings to determine how that was S&P 500 Index (SPX) carried out in the following month and three months later.

The top 15% of readings (above 0.64) resulted in an average S&P 500 return of 7.2% over the next three months, with 88% of returns being positive. The lowest 15% of readings (below 0.445) resulted in a three-month average return of 3%, with 74% of readings positive. In addition, after low values, the returns were close to typical market returns. As I mentioned earlier, this was not the case when I ran these numbers late last year.

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Breaking up bullish and bearish sectors

The table below shows the sectors that make up the most BTO volume among S&P 500 stocks. Technology hardware and auto stocks make up the largest volume at around 25% and 18%, respectively.

Unsurprisingly, call bias is particularly prevalent in tech stocks. More specifically, the 20-day BTO put / call ratio for this sector is 0.287, which is below its typical level of around 0.5 since 2018. Meanwhile, the ratio for auto stocks is higher than the ratio for the entire index, which is 0.445 as opposed to 0.36 for the index. That said, the ratio for auto stocks is much lower compared to its average level of 0.72 since 2018.

When using this ratio to measure investor sentiment, pharmaceuticals and personal goods stocks are the only two sectors that are now more pessimistic than their average ratios since 2018 that they were then.

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