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.
I can summarize our outlook and strategy in two strategic points:
- Yes, the NA markets (US in particular) are overcooked. Our view is for one last pop as the various trade deals (China mostly) resolve. That, plus the initial campaign pop (historically the final electoral year is good for a brief rally in the first quarter) –these indicate that a potential final rally will probably last into the spring of 2020. We plan on riding the train for that last pop, but have a happy sell finger when the trend breaks (weekly chart trend and 200 day SMA). Here is the electoral cycle chart. Note that in the first quarter of the election year, markets are decent, although not crazy strong. It is the second quarter (April-June) where you can see some drift down.
Here is a market optix from Sentimentrader – regarding the sentiment question. Sentimentrader explains this compilation reading as follows:
The Stocks Intermediate-term Optimism Index (Optix) constructed by observing the extremes currently registered by a series of intermediate-term indicators that have had the greatest success in highlighting extremes in price. Each indicator is graded on a scale that is limited on both the downside and upside, so that a historic extreme in any one indicator cannot “overpower” the overall score. Each indicator is limited in its influence, so that an extreme in the model is a true reflection of a broad confluence of extremes among various indicators. Components include indicators like put/call ratios, mutual fund flows, futures traders positioning, sentiment surveys, price ratios, etc. When the Optix exceeds 65%, it suggests a broad number of indicators have reached excessive optimism levels. This is a contrary guide, so such extremes would suggest price weakness going forward.
Note that the opitx is overbought…above the red line…meaning that sentiment is high. But also note that it has gotten much higher before reversing (corrections). This potential ties into my near-termed bullish, mid termed cautious stance. So–a pop, then drop for NA stocks is possible. So whats a poor lad or lassie to do? Read on.
2. Money has to go somewhere. There is an oversold condition in Europe…We expect strength overseas–particularly as Europe EXITS recession. In other words…the US and Europe are likely on opposite economic cycles. Brexit will resolve. Germany will stimulate. To us, this is like 2009 in the USA for Europe. Fiscal/monetary stimulation after recession = rising markets.
We are stepping into Europe. Europe is likely going to see inflow as money vacates the USA. They are stimulating after several years of uncertainty. Remember what happened when the US stimulated to get themselves out of recession? Yup– big bull market! We are playing that potential, one step at a time. Here is the broad European chart – which we view as extremely bullish for a mid-longer termed move. Note the neckline B/O from a H&S formation.
We are inching into the emerging markets, and currently have some China exposure. China trade will resolve, and we expect the market to reward that resolution. We have 4 other emerging market plays we are watching for technical breakouts. So far, the big mover is Taiwan (which we bought a small position in within our aggressive strategy), and a bit of the broad EM ETF – but we are stepping in a bit at a time, not all at once. Keep an eye on this chart:
Regarding the Best-Six cycle: I think it will be a curtailed cycle this time, but we may still see a strong winter for NA markets. New highs on the SPX suggest momentum is here, even if its only here for a few months. Sure, this rally could end a bit earlier than the normal “Best Six” period due to the election cycle (weak spring), the resolution of Brexit and the finalization of trade talks all happening in the first quarter. The old adage “sell on news” applies here. In other words, buy in the uncertainty period (now), sell on the resolution of that uncertainty (after resolution). So, we may see a March or April peak. But for now, there is enough uncertainty leading up to that time frame to drive markets higher as the markets look for resolution to the problems.
Finally, regarding Asad’s question (re the cycle): Each cycle is different. The euphoria was, indeed, seen on this market back in 2017. I wrote a blog on that in October 2017, and I recommend you read it to put that issue to bed. There was most certainly a traditional market madness that year. The “FAANG euphoria” was the exhaustion phase of the bull. Keep in mind that not all bull markets end with a crash. If we have seen the end of the bull (arguable)-there has been no crash, only a sideways or weak period.
The SPX has been pretty lethargic since early 2018 (after the FAANG irrationality). Yes, its making new highs, but they aint nothin’ to write home about. The trend is up, but weakly so. The move to the staples, utilities, bonds etc – and the lethargic new highs – are indeed a sign of a pause in the bull. Perhaps we get one more strong upside per my comments above (resulting from resolutions from Brexit, Trade, and the Presidential campaign starting). Then – who knows. Whether it be further weak upside, or a crash, or a sideways market – ValueTrend’s plan remains to step into international markets, focus on NA stocks with more international exposure, and to trade rotations.
There’s no sense in suddenly bailing out of NA markets given that there has been no change in trend, and enough evidence for a neartermed rally. In fact, we are buying into this potential of a strong winter. We will sell when the market breaks its trend—not before. Meanwhile, we will continue to take money out of NA a bit at a time. We’ll continue to make strategic steps into Europe etc…one step at a time.
Pooled funds
Lana asks for my opinion on Pooled funds.
I don’t like them. I used to work at a bank owned brokerage. Investment Advisors were actively influenced by the firm to promote the in house pooled funds, along with in-house wrap accounts. They also promoted these products (and that’s what they are–they are a product, sold very much like a vacuum cleaner by a sales-oriented Investment Advisor) for their expediency. Advisors could spend more time marketing for new clients and managing the relationships of existing clients without having to manage the money. Advisors became better at the art of relationship management and salesmanship – as opposed to analytics.
The problem with these “products” is, you hold a pool of stocks or bonds that are fully invested through good and bad markets. Further, they are typically pretty high in MER–and the operating expenses (not reported in MER) are on top of that–lots of people aren’t aware of the operating expenses as an additional cost over MER. The higher fees are necessary to allow the many hands in your cookie jar to be paid. The Advisor has to be paid, the bank/issuer has to be paid, and the Portfolio Manager running the funds has to be paid. Then there are the operating costs which need to be paid (custodial, trading, reporting, accounting, etc). Many layers of profit and expense between you and your money!
And no strategy to deal with a bear market. That’s because Advisors are no longer paid to be analytical about such a potential. They are sales people and relationship managers, so they recite the Buy n’ hold mantra…you’ve heard it, I am sure.
If you want active discretionary management, look to a Portfolio Management firm. We are one of them, but there are plenty of us out there to choose from. Most of us charge a flat fee – and that fee includes all those operating costs. Some of us (not the majority) are active in that we will pull money out and raise cash at times. There is no “best” manager out there, but most of the independent firms like ValueTrend survive by talent – not by a reliance on the bank to provide us with clients. That’s my two cents worth. Take it for what it is.
Microsoft
Sally asks if MSFT is in danger of becoming yesterday’s story, much as the FAANGs look to be facing. Well, the chart tells us that MSFT is not breaking its trend. We hold the stock in our Equity Platform, and don’t plan on selling unless the story changes (i.e. a break in trend). This, in contrast to the FAANGs , as discussed here. Sally, this chart will tell you all you need to know (higher highs, higher lows, above the 200 day AMA). Contrast it to the FAANG stock charts, seen on my link noted above. ‘Nuff said!
Short reporting
Tony asked a question that I couldn’t answer. he wanted to know if short interest on stocks is a little hard to see, given that stocks are often traded on one of the exchanges outside of the TSX. In other words, if you look at the shorts on the TSX, are you missing part of the true shorting position? I asked Technical Analysis Intern Aleks Bozic to research this question. We can’t provide you with a full answer to your question, but here is what we (aka Aleks) found out, to the best of his/our knowledge:
Most volume in regards to shorting goes through the $TSX, you can short stocks on the venture but due to liquidity it’s very hard to get inventory to short. Excluding derivatives which go through the Montreal Exchange but they are not calculated as part of short interest meaning that the majority of short trading done in Canada goes through the $TSX. There are also small cap exchanges such as the $CSE & $NEO. According to this press release you can short on the $CSE. In regards to the $NEO I don’t believe you can but I wasn’t able to find any information. To summarize if the reader is viewing the short interest on any financial website that is the total short interest calculated for that set security. Most stocks in Canada are not dual listed between different exchanges meaning for example the short float on $BMO.TO is the short interest that has been taken from the $TSE as it’s listed there. Now since $BMO is also listed on the $NYSE you could view the short interest there but it will be different than the one from $TSE as they are separate exchanges.
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
“ask me anything” should be a weekly segment! Lol
Thank you
Carey
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%.
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
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?
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…
So Keith: What sectors are the smart money going to?
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.
So Bill, I am not crystal clear on this, is it ok to buy an ETF at market price………..LOL. Great site!!
Its Keith — but yeah! You got it!
Thanks for the kind words.