Observations: Monthly
Today 1 month ago 3 months ago 1 year ago
S&P 500 – BULLISH BULLISH BULLISH BEARISH
TSX Comp – BULLISH BULLISH Neutral BEARISH
Oil – BULLISH BULLISH BEARISH BEARISH
Gold – BULLISH BULLISH BULLISH BEARISH
Copper – BULLISH BULLISH BEARISH BEARISH
BULLISH = positive trend, Neutral = Neutral, BEARISH = negative trend
General Observations:
The “everything BULLISH” parade continues. Oil is starting to lose its signal though. Copper keeps getting stronger.
Most other indexes I follow are at the high end of their ranges.
The return of the crazy meme stocks (GameStop and AMC specifically) is a sign the monetary authorities are a long way from cooling down speculative activity.
Real estate continues to hold a bid on light volume too.
Most investments have done nicely so far in 2024.
May you live in interesting times…
A client that watches the markets closely sent me a question pertaining to the meme stocks. The question below:
Can you use the risk ranges to help trade the meme stocks and their crazy moves?
The answer to the question is not really, but risk ranges help a little.
To understand trading, you first must see how it differs from investing. Investing is buying something reasonably priced and holding for the longer term.
“Reasonably priced” is the key concept.
There are lots of ways to define reasonably priced. However, one chooses to make that distinction depends upon their style of investing.
Once the decision has been made that something is reasonably priced, to make an investment for the long term, the next most important variable is VOLATILITY.
Every asset has a volatility level attached to it.
Real estate has a very low volatility AND it does not publish a price at the end of every day. That makes it a great long-term investment that can be safely leveraged…most of the time.
Stock market indexes and Exchange Traded Funds (ETFs) tend to have lower volatility indexes than individual stocks. Again, easier to hold long term.
Here is a general guide towards volatility and how I view it in terms of INVESTING. If the volatility index for an asset is below 19 I will consider making a long term investment.
Now we come to trading…
Trading craves high and rising volatility because volatility, while an asset is going up, usually means it will continue to go up.
This means we have to we need a new set of rules to consider volatility for TRADING.
Entering a trade where the volatility index is below 19 (and rising) is the best situation. This can last for many months and even years.
Let’s use gold bullion as an example. The first chart below is a one-year look at gold bullion. It moved from a sideways profile to a strong BULL market.
The next chart is the volatility index for gold bullion.
Other than one bounce up above the 20-volatility level in April during a BULL market correction, gold has shown an “investible” profile in terms of volatility.
To summarize, a rising price and a low volatility is a good combination. But sooner or later the volatility will rise in today’s world. As money begins to chase the trend, volatility rises…
A volatility index between 19 and 29 for an asset is going to “chop” around and create larger price swings. If the volatility index is above 30 the market is no better than the casino and you are basically betting “red or black.”
The concept of trading requires acute attention to the volatility of the underlying asset.
So back to the meme stocks and trading.
The risk range for GameStop was $22.00-$82.00 on May 14th before the stock market opened. The stock had closed at $31.15 and was set to open around $60.00.
The volatility index for GameStop was 76-ish which is waaaaay above 30!
This is not investible. You are simply making a bet.
This is tradable. One must keep the wager small and the strategy nimble.
Computers do this very well. They can pick out slight changes in volatility and make bets in microseconds. That should remind anyone trading meme stocks they are trading against artificial intelligence programs. (It is a bit like pinning Tiger Woods against a 5-handicap golfer. The 5 handicapper is a good golfer but not in the league of Tiger).
I don’t think many of you reading this are going to run out and trade meme stocks. The rules I have outlined apply to all investing though.
The second part of the question asked by the client was “What do you think it means to the overall markets that GameStop is back to being a meme stock again?”
Answer: Global monetary policy is still too loose to rein in runaway inflation and asset prices. If the Fed cuts interest rates before the end of summer (as I think they will) they will be encouraging more speculation and bad financial behaviour.
I take the crazy meme stock behaviour as a good sign that commodity prices have further upside in coming months since the central banks are unlikely to get aggressive in their fight against inflation.
Wealth Management Updates:
This is the first newsletter under the new format. For a Wealth Management update, I have chosen a basic RBC guide helping people better understand Estate Planning.
Please click on the link below to see a copy of the guide.
Team News:
Thanks again for the feedback on the team format. Next week my phone will be forwarding to Mayumi so that calls will be answered by a person, rather than going to my voicemail.
Let me update the phone numbers of our team and the hours they can be reached.
Mayumi Hara – 250-729-3200 Hrs: 8:45 am – 3:30 pm (Mon-Thurs)
Markus Lindkvist – 250-729-3237 Hrs: 6:30 am – 2:30 pm
Stephanie Antosz – 250-729-3267 Hrs: 8:00 am – 4:00pm
Saul Hilchey – 250-729-3200 Hrs: 9:00 am – 4:30pm
Nick Foglietta – 250-729-3234 Hrs: 6:30 am – 2:00 pm (Mon-Thurs)