Bearish bets are building in the stock market

The market is actually up this month, but bearish bets are building fast.

The big picture: A measure of sentiment from the options markets shows that bets on falling stock prices have sharply outpaced those expecting prices to rise.

• This measure, known as the CBOE U.S. equity put/call ratio, has hit the highest — or most bearish — level on record in recent days.

How it works: The measure is a ratio of bets on falling prices, or “puts,” versus bets on rising prices, known as “calls.”

• During the zaniest days of the meme stock boom in January 2021, the put/call ratio fell to some of the lowest levels on record.
• That reflected near-manic levels of optimism, especially among retail investors, who were dominating the market.
• Now, the put/call ratio is telegraphing incredibly depressed expectations for the stock market.

Yes, but: That might sound like a reason to run away from stocks. But oddly, market analysts usually see extreme levels of bearishness in investor sentiment as good news for stocks.

• The put/call ratio is often used as a so-called contrarian indicator.
• That means when it hits extreme levels of either glee or gloom, stocks tend to then go in the opposite direction — as all the negative or positive sentiment is already priced into the market.

What we’re watching: As fun as it is to read the tea leaves of market sentiment, the only thing that seems to matter for stocks right now is what the Fed does with interest rates.

• Signs of slowing inflation — and expectations the Fed could slow rate hikes as a result — are what’s given the S&P 500 a lift lately.