When used as a contrarian indicator, the scale on my graph below runs from 0 to 100% with 0% the maximum bullish reading and the 100% maximum bearish reading.
For more information, see my January 26, 2016 article:
Invented by Tom Drake, the 2CS is the five day moving average of the product of the VIX (CBOE Volatility Index) and its put to call ratio. On his blog posted titled, 2CS, Tom wrote:
“My favorite and simplest sentiment measure of the US stock market is the 2CS. Take each day's CBOE put/call ratio and multiply by each day's VIX or VXO (I have used the VXO since 1996). Sum the last five days of the daily product of VXO times P/C. When that five day total or 2CS gets under 70 we can start to wonder about the possibility an intermediate term top somewhere ahead. Sometimes the market will stall or go sideways a bit and relieve this condition, and then go higher again. But sometimes 2CS will continue to fall as the market moves up and get below 60. 2CS below 60 is almost always indicative of a significant decline within a week or two.”Here is another version I call my "Hybrid 2CS"
In the past two years, buying the S&P500 when the 2CS was under 30 has yielded good results within a few months. Buying when under 20 has produced even better results.Will this trend continue?
More data: 2CS from 2003 to Aug 2009
Kirk Lindstrom's Investment Letter
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