TSX TrendWatch Weekly

It was a lacklustre week for the most part.  The S&P/TSX Composite Index rose a mere 0.4%. We had an artificially compressed trading week with the TSX computers bringing the exchange down for pretty much a full day on Wednesday. The Venture Exchange, also affected by the same computer glitch, fell -2.7% over the week.
The major US indexes were basically flat-lining it too through last week, although Nasdaq managed a +1.5% gain.

We won’t complain, though, about the improvement in our %-up index above, which rose to 39% from 32% the previous week. The sooner it gets above the 50% mark the better from our “on the sidelines” perspective.

You’ll see this better over at our ETF site, but 68% of the country ETFs we track now have positive trend values.  That’s up from 0% two weeks ago. As top-down proponents, we can just hope for a trickle-down effect to Canadian markets.

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S&P/TSX Composite Index Changes:   The S&P group that manages our major Canadian indexes has completed its index constituent revisions recently, and we implemented them on the weekend.  There were a few additions to the S&P/TSX Composite Index and about 20 or so deletions, because the stocks in question were no longer meeting the criteria for inclusion.All of the data in the DATA & CHARTS workbook reflect the latest overall and sector-specific modifications.We’ve dropped our “size” chart from the DATA & CHARTS workbook because it isn’t all that useful anymore.  There was a time when the S&P/TSX Composite Index companies were divided into 60 LargeCaps, 60 MidCaps and the rest, SmallCaps.  That’s not the case anymore.

For whatever reason, the 60 LargeCaps still make up an index that can be invested in with ETFs or options. The Completion Index, which has replaced the MidCaps index now consists of all S&P/TSX Composite Index companies that aren’t in the S&P LargeCap 60. So, you’d think that there are only two size indexes now… big and small; but there still is a SmallCap index!  The S&P/TSX SmallCap Index contains some of the companies in the S&P/TSX Completion Index, and a whole bunch more that aren’t in the S&P/TSX Composite Index at all.  This makes large/medium/small comparisons far less meaningful, so we’ve dropped the chart to avoid confusion.

If we feel that there are times when larger companies are better investments than smaller ones, and vice versa, we’ll find our own way to demonstrate that.

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Volatility re-visited: We’ve addressed market volatility before… both in the overall market and in terms of how we factor volatility into the relative trend analysis™ (RTA) methodology that we apply to both indexes and individual stocks.  We’d like to expand on that a bit more this week.To examine market volatility in general, investors generally follow the popular VIX, a volatility index based on short-term options prices on the US-based S&P500 index. While I have discussed the VIX in the past, I don’t think I’ve mentioned that it was developed by my brother, Robert Whaley, now at Vanderbilt University, so I have been familiar with the concept from before it became publicly reported.
When we see daily major point moves on the S&P500, VIX is understandably quite high. The VIX ramped up to 80+ levels through the summer/fall as the overall equity markets collapsed. Because of that, the media have been referring to the VIX as a “fear index”. When markets are falling and investors are terrified, VIX rises. That’s true, but it doesn’t explain specifically why VIX rises, since its an options-based measure.

Check out this recent TV interview with my brother to get an understanding of how the VIX rises just as you’d pay more house insurance when you move to a hurricane zone like Florida. (Forget for the moment that this is Fox Business News, a comedy channel by Canadian standards!)

Right up to the cheap shot at the end where one of the interviewers is annoyed that the VIX isn’t called the “fear index”, he clearly doesn’t understand the overall concept.  The general misconception is that when the VIX rises, markets fall.  While that has been totally true this year, the VIX, like any volatility measure, isn’t directional.  It simply measures the range of up and down movements over time.

In a sharply declining market, astute investors pay more for put options to protect their portfolios as Bob explains. But the VIX is built on both put and call options.  What happens when markets start rising again?

Suppose that the markets start rising tomorrow, with similar big price swings on a daily basis.  Imagine upward momentum building toward a feverish pitch. Bull market coming… Hallalujah!  What will happen to VIX?  Shrink?  No way!  It’ll spike like it did on the way down.  Fox TV will suddenly be calling the VIX a “Euphoria Index” instead of a “Fear Index”, without even realizing that they’re contradicting themselves.  They may even interview my brother again, and he’ll explain the flip-side.

From our point of view there’s relative trend analysis™ (RTA), the methodology, and relative trend analysis™ (RTA), the philosophy and everday approach to life.  The latter refers to putting everything in perspective, because the media won’t do the for you. They’ll force feed you one perspective that could be totally wrong… perhaps not that they’re lying, but because they don’t understand what they’re reporting.

Seek out  multiple interpretations as often as you can and make your own decisions!