Daily Gains Letter

margin debt


Bears Becoming Bulls En Masse as Optimism Rises

By for Daily Gains Letter | Jan 15, 2014

Bears Becoming BullsIncreasing optimism is dangerous for key stock indices. Sadly, this is exactly what we’re seeing in the markets right now. It is very evident wherever you look. Stock advisors are saying, “Just buy stocks, and you will do alright.” Investors feel good about stocks. Those who were bearish on the key stock indices since the crash in 2008 and 2009 are also turning bullish—the bears are declining in numbers each week; it’s becoming especially difficult for them to keep their pessimistic stance these days.

One of the key economic indicators that I follow when looking at the optimism in key stock indices is called the Chicago Board Options Exchange (CBOE) total options put/call ratio.

This indicator, at the very core, shows the ratio of volume of puts and call options. When there are more call options, this ratio stands below one. When there are more put options than call options, the ratio stays above one. Currently, this ratio stands at 0.6—a level last seen in 2011. Since at least 2007, this ratio of call options to put options has reached this level only a handful of times, as you can see in the chart below.

CBOE Options Put-Call Ratio Chart

Chart courtesy of www.StockCharts.com

When call options increase, it means investors are bullish towards the key stock indices. When the put options increase, it means investors believe the key stock indices will experience pressures ahead. The current put/call ratio suggests investors are not worried.

Another indicator I look at to assess the optimism on key stock indices is margin debt—the amount of stock purchased on borrowed money. When margin debt is high, this shows that … Read More


What a Phone Call from My Aunt Told Me About the Stock Market

By for Daily Gains Letter | Dec 5, 2013

Phone Call from My AuntA few days back, I got a call from my aunt, whom I haven’t spoken to in a while. It was shocking to me—no, not her calling, but rather what she asked me. Before I go into any detail, here’s some background information: as an investor, my aunt has a little experience with the stock market, but gave up because it didn’t suit her low risk tolerance.

“I have been saving money for some time now; it’s been sitting in my bank account and earning next to nothing,” she said to me. She heard on the news that the stock market in the U.S. is going higher and that the S&P 500 has reached its all-time high—she wanted to know what I thought she should buy. “I think it’s about time I take some risk,” she added.

My aunt hasn’t bought stocks in a while; in fact, she has missed out on all the gains made since the stock markets bottomed in 2009.

What does this tell me?

I find this a little scary, as should anyone who has been following the stock markets for a while. What my aunt said makes me skeptical; it shows that the notion of missing out is emerging. In the past, we have seen the stock markets reach their all-time highs, which gave investors the feeling they were missing out on gains. They bought, the key stock indices increased a little, and then the sell-off occurred; they got caught in it and lost a significant amount of their portfolio. Historically speaking, there are many examples of this.

As this is happening, I see the … Read More