Ask me anything: Answers

Thankyou to all who submitted questions. There were a couple that I chose to answer right away on the comments section -so if you dont see your question being answered here, please refer to the comments section where you posted. I got alot of them – and I’ve covered them all on this one blog. So brace yourself for a longer than normal write up! But, I think you may find that at least some of these questions, which were asked by investors just like you, may be pertinent to your own situation. So its probably worth the time to read, or speed-read, through the list.

I tried to condense the questions into a couple of sentences for easy digestion to readers. Don’t worry, I read your entire question, but I wanted to post them in a fashion that keeps the question and the answer right to the point. I also combined a few questions  with other questions for my first “big question” answer. You’ll see this below. With those caveats, lets get started!

 

The Big Question: Market outlook

Allan asked if we are likely heading into a corrective period. I combined this question with a question from Robert regarding my opinion on Europe, along with a question from Jim on my short termed outlook and if I thought this years “best six months” (Nov-May) will indeed be positive. I also got a question from Asad who notes that bulls often end with euphoria and cyclical outperformance, vs. the current atmosphere of interest sensitive’s (bonds, staples, utilities) outperforming – and meanwhile sentiment isn’t overtly high. He wonders if we are already in a recession or corrective period of sorts. Whew!

Because this is the most asked question, I’ll give it a bit more time than some of the others.

Moneyflow and options trading

Bert asks about comparing smart/dumb money vs Chaiken Moneyflow regarding institutional flow. He also asked about put/call volume as an indicator.

Starting with the put/call ratio: I have studied the put/call ratio and its relationship to the markets. In fact, I incorporate it into my Bear-o-meter. I even wrote a thesis back in the day regarding the put/call ratio. Below is a chart of that ratio. My personal research suggests that when the ratio of total puts (volume) vs calls is above 125 (125% of total volume is puts) it is a sign of fear. That is a piece of evidence to buy. But I wouldn’t trade on it as a sole buy/sell trigger. When the put/call total goes to 0.75, that means too many calls (too bullish). Its a sign of overconfidence. Again, a danger signal, but not to be used in isolation. The chart below shows us that markets are getting closer to being “too” confident. But not over the 0.75 line…yet.

 

Chaiken MF isn’t about institutional buying. It’s basically just a momentum indicator for the author’s Accumulation/Distribution line. That line is basically measuring movement at the top vs. bottom of the days movements incorporating volume. Sure, it can contain higher volume if institutions are trading–but it isn’t a pure institutional reading. The only people that do that who I am aware of are Sentimentrader via their various sentiment indicators.

Below is a chart of the TSX 300 with the Chaikin moneyflow indicator on the weekly chart. Of course, when markets fall, you will see a momentum indicator like this decline. The trick is to look for divergences.  Note how it diverged in 2016 ahead of that correction. Note how its diverging now…..Hmmmmm…

 

ETF volume 

Carey asks about potential volume problems with Cdn listed ETF’s. Specifically,  what criteria regarding ETF maturity, Market Cap and volume what would you suggest is required before the little guy can buy in?

My answer to this is simple: It is fine to buy any Canadian listed ETF, even one with super low volume – but only under one condition! Always buy with a limit order! Put the order in at or near the Ask price. When you sell, put the order at or near Bid price. The market maker controls that spread.  If you go market–you are buying or selling off of current market traders on the ETF. They will try to sell it to you for as much as they can, or buy it from you as cheaply as possible. This often results in you never getting close to the fair “NAV” price. If you go limit at the Bid or Ask, or say, a penny or two off of that, the market maker will have some obligation to meet that price, or near it. Remember, the underlying will usually have plenty of volume. The market maker is more concerned about buying or selling the ETF at or near the underlying price, with a reasonable spread to protect against quick moves on the market.

Again: Never, never, never go market price on an ETF for either a buy or a sell!!!!

 

 

 

9 Comments

  • Keith,
    Thank you for your response to my question about pooled funds. I ask this because many many of the guest hosts on BNN offer pooled funds and pooled segregated funds, depending on the amount of money you have to invest. As a trial, after much research on my part, I bought a tiny position in one of these pooled funds. My frustration is that after purchase, you don’t really know what stocks you own, what has been bought or sold, until you get the 6 month unaudited and annual financial statements. The quarterly statement provided by the trustee is lousy, as is the web-access to the account. I intend to sell. Makes me wonder in hindsight what I missed in my research. FYI This is not a bank owned product, this is a ‘wealth management company pooled fund with a MER of 1.5%.

    Reply
    • Don’t forget Lana, the MER is one thing, then the fees are an addition that are kinda harder to find in the prospectus. I’m going to bet that your actual cost is closer to 1.75-or higher.
      And yes, its not just the banks–they are all in on that game. Go to a PM if you meet their criteria and you want your money managed. If not, consider rotating sector or broad market ETF’s using a bit of the knowledge you are gaining here, and from the technical analysis books (like mine!) you read

      Reply
  • Hi Keith,

    Thanks for your ongoing and excellent commentaries. Much appreciated! As for your take on Europe (2. Money has to go somewhere), here’s another opinion:

    “Under a 2012 pledge to do “whatever it takes” to save the eurozone from collapse, predecessor Mario Draghi drove interest rates deep into negative territory and pumped trillions of euros into the economy through QE. With an almost exhausted ECB monetary toolkit, unprecedented dissent has broken out between those eurozone members who back this policy and those who are losing faith in further easing.”

    If their toolkit is indeed exhausted, how will Europe manage to come out of recession?

    Reply
    • Good question Dee–I guess the TA in me says “charts before all”–and the chart is great for most of the EU countries. Also–from my very armchair economists point of view–look at how long the USA has been teetering on “exhausting” their monetary toolkit. Yet, they keep printing money…can EU do the same? I don’t know, but, it has been the case in the USA…
      Whatever the case, I’ll focus on the charts….so far, very bullish…

      Reply
    • Tom–good question. You inspired me to do a quick look at sentimentrader.com sector ETF data–the bad news is that their work shows most sectors are overly optimistic from a sentiment view. The exceptions appear to be healthcare, nat. gas, and (surprisingly) utilities. Also the VIX is becoming oversold from a sentiment perspective. There is no “smart/dumb optix for the individual sectors –only net sentiment charts on that site–so that is all I could report on. Hope that helps a bit.

      Reply
  • So Bill, I am not crystal clear on this, is it ok to buy an ETF at market price………..LOL. Great site!!

    Reply

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