No Signs of Capitulation

I regularly look at the options market to see if the fast money / speculative money is leaning bullish or bearish.  After the carnage that you saw last week, one would expect there to be a lot of put buying.  I thought I was the only one seeing things when the SPX, SPY, and QQQ options data was telling me that there was actually more put selling than put buying, and more call buying than put buying last week in the index options space.  

I listened to a podcast recently from Benn Eifert, an options guy, and his statements collaborate with what I'm seeing.  

They are:  

1. Little demand for short-dated puts, as it seems many have gotten burned buying expensive puts that didn't pay out even during the downtrend this year.  

2. Quite a lot of demand for index calls, looking to play a bear market rally.

3. Very little skew, showing the lack of demand for out of the money puts from the investor community.  

4. Not many volatility sellers since March 2020 black swan event for vol funds.  So fewer volatility short squeezes as there aren't many weak handed vol sellers.  

And from what I am reading on Twitter, I can basically sum up what the mood is of the crowd.  Short term bullish, looking for a bounce, but maintain long term bearishness due to Fed rate hikes and high inflation.  That is a bad combination, in fact, you would rather have short term bullish and long term bullish sentiment vs. short term bullish, long term bearish.  Because the short term view will be easily shaken among those long for a trade.  

The weak hands are on the long side, it remains that way.  Until you get down to low enough levels with signs of capitulation (lots of put buying, little call buying) and positioning has been cleansed to more neutral levels, you will see rallies fade away quickly, and it will be a better market to short than to go long.  

In the investor psychology cycle, you are somewhere between denial and fear, and heading towards desperation and panic in the coming months.  

The move lower is still not done, you got a big gap up which is quite tempting to short, I might put in a small short today to hedge some of my energy long exposure.