“Smart money” places its bets on the market’s future

The “smart money” crowd has been placing a lot of bullish bets on the future of the large cap stocks as measured by the S&P 100 (OEX).  The OEX put-call ratio, which is historically a “smart money” indicator has registered one of its most bullish reading of the last four years. 

 

To see where the smart money is putting its money we examine the 3-week (15-day) moving average of the OEX put-call open interest indicator.  Whenever this indicator declines below the green zone (see chart below) it implies the smart money is heavily purchasing call options, i.e. bullish bets on the stock market. 

The OEX open interest ratio is by no means a precision timing indicator, for it can be several weeks – or even months – early in its signals.  But historically whenever the ratio has gotten this low there has always been a major rally ahead for equities in the not-too-distant future. [Excerpted from the May 24 issue of Momentum Strategies Report]