Bullish sentiment in the U.S. stock market has spilled over into the options market, with a key indicator dropping to its lowest level in nearly four years, closely matching the levels seen just before the onset of the 2022 bear market, prompting market participants to sound cautionary warnings.
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, its lowest since March 30, 2022. This means investor demand for call options is more than double that for put options.
Mark Arbeter, President of Arbeter Investments, told MarketWatch in an interview that this reading is "historically extremely low." While not a direct sell signal yet, it is enough to put investors on high alert. He believes this reflects overly exuberant sentiment among retail investors, fueled by the artificial intelligence frenzy.
The last time the indicator hit similar levels was during the peak of the first "counter-trend rally" in the early stages of the 2022 bear market; an earlier instance occurred around the market peak in late 2021. Both historical precedents were followed by sustained declines in the stock market.
Meanwhile, Mandy Xu, Head of Derivatives Market Intelligence at Cboe, pointed out that while the overall market volatility gauge VIX continues to fall, the implied volatility of individual stocks has surged significantly. The spread between the two has widened to a record high, revealing high levels of internal divergence within the stock market.
However, despite these warning signals, the bullish momentum has not diminished. On Monday, all three major benchmark indices – the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite – set new all-time closing records. According to Dow Jones Market Data, the S&P 500 has recorded 23 new all-time closing highs year-to-date.
Put/Call Ratio Hits Four-Year Low
The five-day moving average of the Cboe equity put-to-call ratio closed at 0.452 last Friday, its lowest since March 30, 2022. Mark Arbeter noted that this value indicates investor demand for call options is more than double that for put options, placing it in the extremely low range on a historical scale.
The 21-day moving average of this indicator also declined, falling to 0.493 last Friday, a new low since December 9, 2021 (when it was 0.490). Mark Arbeter stated that as long as this moving average remains in a "downward trend," the stock market may still have room to continue rising, but the trend itself is evidence of an overheating market.
It is worth noting that put options can be used either as directional tools to bet on market declines or for portfolio hedging. When investors massively buy call options and hedging demand plummets, it often signals that market risk appetite is nearing extreme levels.
Historical Precedents Point to the Eve of the 2022 Bear Market
Mark Arbeter's review of history shows that the five-day moving average last reached similar levels during the first "counter-trend rally" of the 2022 bear market; looking further back, comparable readings also appeared during the market topping phase in late 2021.
"We saw similar levels as the market entered the topping zone leading into the 2022 bear market," he said.
Following these two historical junctures, the U.S. stock market entered sustained downturns, 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 at present, but historical experience is enough for investors to exercise restraint when chasing gains.
Increased Internal Market Divergence, AI Concepts Dominate Gains
In contrast to the calm appearance of the overall market, significant internal divergence is emerging within the stock market. Mandy Xu noted in a report released Monday that single-stock volatility, as measured by the VIXEQ index, approached a one-year high last week, with the spread relative to the VIX widening to a record high.
This is the latest signal that internal market divergence has risen to extremely high levels in the past two months—stocks related to artificial intelligence have dominated most of the S&P 500's gains.
On Monday, the S&P 500 Information Technology sector surged about 2.5%, becoming the core support for the index hitting another record high. FactSet data shows that among all 11 sectors of the index, only the Technology and Energy sectors closed higher on the day, while most other sectors declined.
The rise in the Energy sector is related to geopolitical disturbances. Reports indicate that Iran has halted peace talks with the U.S. and is seeking a full blockade of the Strait of Hormuz—a crucial waterway for oil and gas exports in the Middle East—pushing international oil prices higher.
However, U.S. President Donald Trump responded in a social media post Monday afternoon, stating, "Talks with the Islamic Republic of Iran are still moving quickly."
