The S&P 500 may be down slightly this Friday afternoon after a fairly flat week, but that does not mean that all traders are bearish. In fact, option traders still appear to be quite bullish. Investors buying call options still outnumber put option buyers by more than 2 to 1 in the S&P 500 SPDRs ETF (SPY) for the September at-the-money strike price.

When a traders buys a call option they think the stock is going to go up, and when they buy puts they think the stock may go down. The ratio between calls and puts is often looked at as a reflection of underlying trader sentiment. Significant changes in this balance may indicate that sentiment is changing.

Can you imagine this! The outlook in the UK has been downgraded by Standard & Poor's to negative from stable. To underscore the dire economic circumstances in the UK, Standard & Poor's David Beers said: "We have revised the outlook on the UK to negative due to our view that even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP and remain near that level in the medium term." Yet the Agency did maintain the UK's long term sovereign credit rating at AAA.

The report triggered a drop of 1.2% in the pound to $1.5529 to the dollar and 1.4% against the euro to .8866 pounds.

Bloomberg News reports that Connecticut's attorney general has subpoenaed McGraw Hill (NYSE: MHP)'s Standard & Poor's related to an investigation into credit rating.

The legal question is whether S&P issued overly rosy credit ratings on subprime mortgage-backed securities (MBSs) that later lost more than half their value. S&P and its peers were competing for the lucrative ratings fees paid by the investment banks that underwrote the MBSs. And it has been alleged that the winning firms offered the highest ratings.

If the MBSs were indeed the financial equivalent of toxic waste -- then the AAA ratings that S&P and its peers awarded to the MBSs could be thought of as golden wrapping paper. This gold wrap was particularly useful to the investment banks when they visited MBS customers in Europe and Australia.

Rather than get into the details of what was inside the gold-wrapped boxes, these customers simply relied on the assurances of the MBS sales people that the "investment" had been blessed by S&P. No need to dirty themselves with unwrapping the box and exposing the toxic waste within.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post.