A historically reliable options indicator is flashing a warning sign for high-flying Chinese tech giant NetEase Inc (ADR) (NASDAQ:NTES) right now.
That’s according to the options experts at McMillan Analysis Corp., who today note that their computer generated Put-Call Ratio Sell Signal has been visually confirmed by Netease’s chart (see below):
According to McMillan, “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.”
When these ratios hit historical highs or lows, they tend to become contrarian indicators. Such is the case with NTES right now, which appears due for a short-term pullback, according to the extremely low put-call ratio seen on the chart above. Essentially, we’re seeing an extreme reading of bullish bets over bearish bets, and these situations tend to correct with a sometimes violent price downturn.
That’s not to say it’s any sort of guarantee that NTES will drop in the near term — only that the odds of a bearish move are becoming much more likely.
NetEase Inc (ADR) shares were trading at $305.75 per share on Monday afternoon, up $2.13 (+0.70%). Year-to-date, NTES has gained 42.98%, versus a 9.08% rise in the benchmark S&P 500 index during the same period.