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…
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!!!!