Ask me anything: answers!

Last week I offered to do an “Ask me anything” blog. I received several questions, a few of which I answered right on the spot (they were not “big” enough questions to do a full write up on). But I did select 3 questions that I thought might be of interest to all. Here they are:

 

Long bonds

Reader Eugene wrote that he was curious about the TLT (which is the 20 year US Treasury ETF) and its relationship to the stock market. He asked if I felt the trend had broken for TLT, and if there was any historic predictive nature to such breaks.

To answer the question regarding the relationship between bonds and stocks, I would refer to a blog that I wrote back in April. Here’s the link . To cut to the chase, I illustrated that there has indeed been some negative correlation between stocks and bonds. Please refer to the chart on that blog to see my point. Given that the long bond has been selling off, we might expect that the stock market should – at least in the next while, remain bullish.

Let’s focus on the outlook for bonds: Rather than post a chart of TLT, I thought I might post this chart of the 30 year bond ($USB)—which had been in an up trending price channel  since I got into the Investment business in 1990. This huge macro trend was recently cracked for the first time in almost 30 years. In the past, a move near the bottom of the price channel, which coincided with a move by the simple 12-bar “ROC” (Rate of Change) momentum oscillator on the monthly chart signalled a rally for the long bond. The ROC has been oversold twice recently – once in 2017, and again this summer. Neither case has pushed the long bond back into the price channel. I note this as an important event because of something Martin Pring said at a seminar I attended many years ago. Martin – probably the best authority on using momentum studies in Technical analysis – noted that if you get no response off of an oversold level, you may be entering into a breakdown of the trend – leading into a new era of price performance. This does indeed look to be the case for the long bond.

 

Canadian ETF’s

Reader Paul asked if low volume on Canadian ETF’s vs. the US counterparts, such as SPDR’s, (which can have huge volume) matters. ETF’s often have low volume. This is not a problem, so long as you enter price limit orders when buying them. They differ from stocks in that new units can be created or redeemed by the ETF’s market maker as necessary.  For example, if there is an ETF with only 500,000 shares issued, each trading at $10, and demand increases for another $1 million in the fund, the ETF provider creates 100,00 new shares (assuming the underlying is reasonably liquid) to meet the demand on a timely basis. Note that if the ETF holds illiquid investment, this might cause a wide bid/ask spread due to the difficulty of buying the underlying on short notice. But normally this isn’t the case. The point I am making is that this is not a capped number of shares like a stock. They can create or “destroy” as many shares as needed, and simply buy or sell the basket (often a futures contract if it’s an index or commodity)  of the underlying as needed.

Please note that I started this answer off in stating that you need to put price limits on buying or selling low volume ETF’s. If you go “market”—you are indeed buying or selling from the existing unit holders. In this case, you might not get a fill that is tight to the underlying “NAV” (Net Asset Value) of the ETF. Stick with limit orders on all but high volume ETF’s and you should be fine.

 

Cannabis

Reader Parm asked if I feel that the cannabis sector has popped – and if it has a good longer termed technical outlook. By “popped”, I assume Parm means, negative connotations. To that question, I would say not – unless he meant it as a positive breakout. The HMMJ (Horizon’s Cannabis ETF) and WEED (biggest Cannabis company in Canada) are clearly in good technical shape. Below are the charts of these two securities illustrating this fact.  I covered this subject a bit more extensively in July, on this blog.

 

 

10 Comments

  • I was inspecting the SPX this morning and am a little confused as to where the trend lines should be drawn. I drew one at Apr 2nd, which shows we are a little ways from crossing. And a second line starting at July 6th, which shows we have now had three days below, your magic point of exit. In, we have all indicators indicating negativity and the first level of support reached (2860) but not yet crossed.
    Is the SPX a sell yet?

    Reply
    • Fred–trendlines are indeed a perspective from differing timelines. You can draw a big one from the 2009 lows, or break the trendlines down from various start points such as after the pause in early 2016.
      Personally, when confirming an uptrend, I resort to the weekly chart …. higher highs and higher lows while remaining above the 200 day SMA (40 week) as my most important trend indication.

      Reply
  • With interest rates likely to increase, are the US Banks setting up for a decent trade?

    Reply
    • Good question Dave–I will address this on a follow-up “Ask me” blog.

      Reply
  • Hi Keith,

    It looks like top pick BCE has broken support. Is there another level of support below?

    Reply
    • Hi Paul
      sometimes we have to take the market’s actions into account with individual stocks. Everything has hit the fan. Not just the poop. So give it a bit before pulling the trigger–this is not a company specific move yet, it is a mass reaction move. Different. Todays blog–posted later in the day, will help you get a handle on market conditions.

      Reply
  • What are the risks of an inverted yield curve? I currently have a position in Bank of Nova Scotia (400 shares) at $74.69. Would you consider adding to this position with its recent decline in price? I also have 400 shares in TD Bank at $71. These stocks represent a good position in my portfolio. I also hesitate buying US stocks because of the exchange going against the Canadian dollar. Thanks.

    Reply
  • Keith – it looks like that pullback in the markets you predicted has come to fruition. What will you look for before scaling cash back in? I know you mentioned Nov/Dec are normally good months to be invested. Thank you.

    Reply

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