The bearish sentiment surrounding the PowerShares QQQ Trust Series 1 (NASDAQ:QQQ) has surged to yearly highs, and an important contrarian indicator says it may be a buy signal.
That’s the message from the options experts at McMillan Analysis Corp., who today published a note that their computer generated dollar weighted Put-Call Ratio Buy Signal has been visually confirmed by QQQ’s chart (see below):
As you can see above, the put-call ratio (blue line) has absolutely surged over the past couple of months and is now at the highest levels we’ve seen in over a year. In essence, this means that bearish options bets on a dollar basis are dwarfing those on the bullish side.
This sort of severe imbalance typically ends with a sharp turn in the other direction, and in QQQ’s case, could mean a quick rally in the short term.
For more on put-call ratio and its value as a contrarian indicator, check out McMillan’s explanation:
Put-call ratios are useful, sentiment-based, indicators. The put-call ratio is simply the volume of all puts that traded on a given day divided by the volume of calls that traded on that day. The ratio can be calculated for an individual stock, index, or futures underlying contract, or can be aggregated – for example, we often refer to the equity-only put-call ratio, which is the sum of all equity put options divided by all equity call options on any given day. Once the ratios are calculated, a moving average is generally used to smooth them out. We prefer the 21-day moving average for that purpose, although it is certainly acceptable to use moving averages of other lengths.
While a surging put-call ratio is by no means a guarantee that an ETF will rise, it is a historically reliable tool for traders and investors to use to identify ETFs that are due for short-term jumps (or pullbacks). It pays to closely monitor QQQ’s share price over the next several sessions as a result.
The PowerShares QQQ Trust Series 1 ETF was trading at $140.42 per share on Wednesday afternoon, up $1.37 (+0.99%). Year-to-date, QQQ has gained 18.52%, versus a 9.09% rise in the benchmark S&P 500 index during the same period.
QQQ currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 34 ETFs in the Large Cap Growth ETFs category.