The 2CS Revisited
The 2CS Sentimeter is my favorite gauge of the extremes of investor complacency and panic. The 2CS is quite low at stock market price highs and quite high at important market lows. It is very simply calculated daily by multiplying the daily CBOE combined put/call ratio by the daily CBOE VXO. (You could use the CBOE VIX instead, but I prefer VXO as it allows me to compare with charts and data I have back to 1996.) Add up the daily P/C*VXO of the past five days and you have the 2CS. (Click on chart for larger version.)
The first monthly chart of the SPX shows the extreme 2CS value in red numerals at important highs and lows from 1996 to 2007. 2CS has been at or above 200 at most of the major crash lows since 1996, with the greatest bearish extreme of sentiment coming right after 9/11/01. The market low after the Russian default and LTCM crash of 1998 also had an extreme bearish reading as did the double lows of July and October 2002. At the re-test of the market low in March 2003, 2CS was 165.
The second and weekly chart of SPX since June 2007 shows up 2CS as an accelerated version of the 1998 to 2002 market. After August 2007 the SPX made new all time highs, but 2CS did not go as low as it had in February and March 2007. I call this "sentiment divergence" which was also seen in 2000. WE also sometimes see sentiment divergence on daily charts during smaller period turns. And, of course, the same can happen at lows.
As the market fell from the early October 2007 SPX high, two 2CS readings near 200 were seen at the January and March 2008 SPX lows.
Another 2CS historical finding, not all of which is shown on these charts, is what happens on the rallies between two successive >200 2CS market lows, such as 1998, 2002-2003, and 2008. In all cases the 2CS reached levels between 120-130 on the rallies between the lows, most recently 123 on April 7, 2008.
My judgment is that SPX may have seen "the" low but that another retest may have started this past week which will probably make a higher market low and smaller 2CS reading than at the previous lows of January and March 2008.