Record Bearish Options A Buy Signal?

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According to Business Week, option contracts that pay off should the benchmark index for U.S. equities plunge more than 23% from its April highs are 75% more expensive than contracts speculating on gains. This is the biggest premium ever, and Blackstone's (NYSE: BX) Byron Wien thinks that this is a buying signal. “Bearishness is high. The best time to buy stocks is when the level of bearishness is at a peak,” Wien said.

The 10-day average difference has exceeded 50% thirty-four different times in the past since 1996. On average, when these conditions were in place, the S&P 500 rallied a median 7.2% in the following six months. Record bearishness persists, despite the fact that S&P 500 companies are projected to post 38% profit growth in two years. The S&P currently trades at 13.1 times 2010 EPS estimates, which compares to a historical average of 16.4.

“When you see this much fear in the market, it’s probably the time to get a little more constructive and possibly look to putting money to work,” said Peter Sorrentino, who helps oversee $13.3 billion at Huntington Asset Advisors in Cincinnati. “The skew is too heavy. The paranoia premium has driven it up.”