U.S. stock options data flashes a red warning: The last time this signal appeared was on the eve of the 2022 bear market.

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Bullish sentiment in the U.S. stock market has spilled over into the options market, with a key indicator falling to a near four-year low, closely matching the level seen just before the onset of the 2022 bear market, prompting cautious warnings from market observers.

According to Dow Jones market data, the five-day moving average of the Cboe equity put-to-call ratio dropped to 0.452 last Friday, the lowest since March 30, 2022, indicating that investor demand for call options is more than double that for put options. Mark Arbeter, president of Arbeter Investments, told MarketWatch that this reading is "extremely low by historical standards." Although this is not a direct sell signal at present, it is enough to warrant vigilance among investors. He believes this reflects overly exuberant sentiment among retail investors, fueled by the artificial intelligence boom.

The last time this indicator reached a similar level was during the rebound peak in the early stage of the 2022 bear market; another earlier instance occurred around the market top at the end of 2021. After both historical precedents, the stock market experienced sustained declines. At the same time, Mandy Xu, head of derivatives market intelligence at Cboe, pointed out that although the overall market volatility index VIX has continued to fall, implied volatility for individual stocks has surged, and related spreads have widened to historical records, revealing significant internal divergence within the stock market.

However, despite these warning signals, bullish momentum remains undiminished. On Monday, all three major benchmarks—the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite—closed at fresh all-time highs. According to Dow Jones market data, the S&P 500 has already recorded 23 all-time closing highs so far this year.

Put/Call Ratio Drops to Four-Year Low

The five-day moving average of the Cboe equity put-to-call ratio closed at 0.452 last Friday, the lowest since March 30, 2022. Mark Arbeter pointed out that this value means investor demand for calls is more than twice that for puts, putting it at an exceptionally low level by historical standards.

The 21-day moving average of this indicator is also falling, dropping to 0.493 last Friday, the lowest since December 9, 2021 (when it was 0.490). Mark Arbeter said that as long as this moving average remains in a "downward trend," the stock market may still have room to rise, but the trend itself is evidence of an overheated market.

Notably, put options can be used both to bet on a market downturn and as portfolio hedges. When investors aggressively buy calls and hedging demand falls sharply, it typically signals that risk appetite is nearing an extreme level.

Historical Precedent Points to Pre-2022 Bear Market

Reviewing history, Mark Arbeter found that the last time the five-day moving average hit a similar level was during the first "counter-trend rally" of the 2022 bear market; going further back, a comparable reading appeared during the market top at the end of 2021.

"When the market was entering the top region before the 2022 bear market, we saw this kind of level as well," he said.

After these two historical points, U.S. stocks entered persistent downward cycles, providing a reference for the current warning signal conveyed by the indicator. Mark Arbeter also emphasized that the current situation does not constitute a clear sell trigger, but historical experience is enough for investors to exercise restraint when chasing rallies.

Internal Divergence Intensifies, AI Themes Lead Gains

Contrasting with the calm façade of the overall market is significant internal divergence. In a report released Monday, Mandy Xu pointed out that single-stock volatility, as measured by the VIXEQ index, approached a one-year high last week, with the spread from the VIX widening to a historic record. This is the latest evidence in nearly two months of extreme internal divergence in the stock market—with AI-related stocks leading much of the S&P 500’s gains.

On Monday, the S&P 500 Information Technology sector surged around 2.5%, providing the core support for the index’s new all-time high. According to FactSet, out of the index’s 11 sectors, only technology and energy finished higher that day, while most other sectors fell.

The rise in the energy sector relates to geopolitical tensions. Reports state Iran has halted peace talks with the U.S. and is seeking a full blockade of the Strait of Hormuz—a critical Middle Eastern oil and gas export chokepoint—pushing international oil prices higher. However, on Monday afternoon, former U.S. President Trump replied on social media: "Negotiations with the Islamic Republic of Iran are still progressing rapidly."

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