Transcript
Hello and welcome to The Download. I'm your host, Dave Richardson. I should say, Sad Dave today. Stu, we've both got princesses who are going to Queens University in Kingston, and I just dropped off Princess Sarah at the train back to school. Well, they've only got three weeks left, so it won't be too, too long.
That's right. And it always leaves a bit more mark on the parents at this age. It feels like the end of an era versus for them, they have excitement about what's in front of them, even if they have some melancholy moments.
Yeah, they get excitement about the summer. How does your wife handle this?
Probably like every family. We were pretty worried about it. The biggest change has been all the technology. When we went to university, you called your parents on Sunday night with the clock ticking because long distance cost a buck a minute or whatever. Now you're just back and forth all day long. Sometimes it's FaceTime, sometimes it's text, sometimes it's this. There's been a lot more contact, I think, than either one of us imagined, which definitely eases the blow.
I was trying to explain that to my daughter about the long-distance calls and why you didn't just pick up the phone. We were in Montreal and my grandparents were in Toronto, and you didn't just pick up the phone and call them anytime. You watch the clock because the time ticked away.
And you do the collect call. You send it to your parents, and it’d be the collect call, and you’d go, I'm fine! And then you just hang up.
See, you're always smarter than me. I always ran up the bills on my parents. But as I said at one of the events I did, I was speaking and I talked about how lonely my wife and I are because we're empty nesters for the first time, at the start of the school year. And a guy comes up to me and says, why are you worried about that as an investment guy? And I went, I don't know what you mean. He goes, look, your kids are just like the stock market. If it goes away, it always comes back. And you should know that as an investment guy. Don't worry, your kids will come back, and they'll spend 25 to 35 with you, and then you won't feel so bad about it. And that really gets us to where we are. We're going to do an investment stew today and talk about a little bit of a rebound in markets. Has anything caused this, Stu, or how do you do the analysis around this little bounce back that we've seen?
When you have a decline that we saw, it's almost always caused by a small change in sentiment, or it begins in a change of some facts. Then it picks up speed because there's deleveraging, there's margin calls, there's derivative positions, all sorts of things. That ends up creating a bunch of selling that may or may not be fundamental, and it can push markets down a little bit faster than any might think. Normally, we try and put some money to work into those types of environments. Then when that passes, you often get a reprieve, and you get a bounce back. Not dissimilar to trying to hold a beach ball under the water and then you move your hand away and the ball is going to come back up. And in the process of that recovery, you also have to acknowledge as investors that the initial spark was a bit of a change. Is the economy going to grow quite as quickly as people thought? Are earnings going to be as robust? Valuations were a little bit higher, that type of thing. While we're having a recovery, I'm not sure it'll be up, up, and away. You never know. But more often than not, the market recovers a little bit, and then the debate has to persist. That debate has been, will tariffs end up slowing the American economy more than people thought? Is some of the American exceptionalism changing? Does that have implications for big US consumer brands? All sorts of things that are now on the table. Investment teams are busy working through that. When you get a bounce, you tend to look at what's going on inside the market a little bit more than you might otherwise. In the decline, you're looking for a lot of sentiment indicators to suggest that we're washed out. Volatility, bullish sentiment, put-call spreads, things like this. So one of those indicators is volatility. And you can trade volatility on a one-month basis, on a three-month basis, and so forth. And one of the signs is when near term volatility goes higher than the longer-term volatility, that is often a symptom of a short-term low. And that did take place. Then once you move beyond some of these sentiment indicators and you're back to saying, okay, well, from the low, which stocks bounce the most? Which stocks bounce the least? What would we have thought? How does that change? Is there some message that the market is sending us in some of this behavior? One of the big factors that we really like is called relative strength. And relative strength is how you are doing or how this company is doing their share price relative to the market as a whole. So right off the bat, when the market is declining, a bunch of defensive stocks often start having relative strength. That doesn't mean that their prospects are any better. They might just be a parking spot for cash during that period of time. And then, throughout all of this, there's been some stocks that really didn't correct that much and have been quite strong right off the bat, looking at things like copper and things like this. I know there's some tariff implications perhaps impacting some commodity markets, but nevertheless, to see copper pushing on $5 a pound while people are worried about the economy. They used to call it doctor copper, right? So there's lots going on, and there's always lots to talk about.
Yeah, I raised actually copper on another episode of the podcast because you've seen copper move from 3.60 or 3.70 at the bottom over the last few months to now well over $5. And $5 you just never heard of before. It kissed that last year, or I guess over the last 18 months, but fell back down, and there it is back again. And as you say, that's usually a pretty good sign because of its pervasive use through the economy of demand for something. And if there's demand there, it generally means growth is going to be okay, which is why they call it the doctor. Just one other thing. You went through that list of you're talking about relative strength. You mentioned put-call spreads. So could you explain that, how put-call spreads works, and then how that's an indicator of a bottom or a top for that matter?
Yeah, so a lot of technicians would look at a handful of indicators for stress in the market, as I mentioned sentiment. Then there's the volatility. The one actually that didn’t really trigger this time was the put-call spread, which might be muted a little bit by the amount of derivative ETF activity that's out there now. A put gives you the right to sell the stock market, and a call gives you the right to buy it. When the number of puts spikes relative to the number of calls, it's a sign that everyone wanted protection. Everyone wanted to take away the impact of the stock market going down by buying puts. So you can look at this graph over a long period of time. And when you get a spike in the put-call ratio, it normally is the short-term bottom, because it's like saying everyone ran out to buy insurance in the middle of the rain, so to speak.
And when you buy a put, you're hoping the market's going to go down. That's why it provides that protection. And that's why people are buying when you get into a crisis. Like you say, when it spikes, people are really racing to the exit and expecting markets to go down, you get to that spike. And as soon as everyone's on one side of a trade—we've talked about this a lot—that's generally when you want to sniff around and start to think about maybe going to the other side of that trade. So that's a great example of how that works.
Yeah, and that's how volatility dovetails as well, because the price of an option is driven by the time horizon and how much volatility you think will be in the marketplace. So when volatility spikes, that means the cost of options go up, and then it can be driven that much, even more so if there's more puts being bought than calls.
Yeah, and we've talked about volatility on previous episodes. By the way, you just don't want to miss anything that Stu has to say on Stu’s days. And I'm sorry, I didn't announce that it was a Stu’s day today. Well, every day is Stu’s day, I think that's what we've come to. But it is another Stu’s day. So you can listen to all the previous Stu’s days, along with all the other guests that we have on the Download podcast. Please subscribe, where you subscribe, wherever you download your podcast. And then I think we're on video today on this one. And when we're on video, we're on YouTube, so you can click subscribe. Give us a five-star rating because Stu and I, our parents are tired of hitting the five star and being the only ones doing it, and subscribe and make a nice comment because this is always helpful in getting more people to get to Stu and is great advice. And so when we talked about volatility, we talked about one of the measures that you can watch as an investor, and it's called the VIX. Actually, you just go on to some of the different websites that show markets, and they will show you the measure for the VIX. And we were kicking around for a long time as stocks were going higher with a VIX in around 12, 13, 14, 15. And then through this episode of volatility, we spiked into the high 20s. I was just looking before we got on, it's sitting around 18 again, so we saw that spike up and things have settled down, and lo and behold, we're starting to see a recovery.
Yeah, and then when you get a recovery, the market will rally at some degree. Some people might start writing some calls on the view that there was this potential slowdown that hadn't been as factored in, that now likely has some discussion that needs to permeate. So you might get a little bit more of a range bound market for a period of time. Often in corrections, you will revisit the old lows. It's just one of the old traders’ axioms around a double bottom type thing. I think probably the biggest message is it's really just business as usual inside of an asset management firm.
So Stu, as you said, you were in nibbling a little bit over the last week or so as you were coming down to that bottom, you were in a little bit more of a conservative position, you had a little bit of cash, you moved a little bit in. But if your expectation is that this is a bounce that may come back and revisit these lows again, is that more of a tactical trade? Is that in and out? Or is that just the starting point of maybe building up a new position and deploying a significant amount of cash, and you're going to buy some more on that next bottom or if it even cracks through that bottom and goes even lower?
Yeah, unfortunately, it's a bit of all of the above. I think there's a couple of things. You're trying to put money to work into the panic, and then as it subsides, naturally maybe you want to take some off. That's part for the course. But then really, what you want to do with your portfolio is not so much big asset changes of that manner. It's like saying, boy, there were some stocks that I owned in the decline that I really don't want anymore. They went down in a manner, and some of the concerns that were presented to them, I'd like to deal with those. I don't want to deal with them during that phase. I want to deal with them during the bounce phase. Then there's other things that maybe you bought in the bounce phase, and you're not getting rid of those because you got those at great prices and you really like these businesses, and then their bounce was actually quite impressive and that's when I'm going to maybe buy more of as things play out. So the high grading of your portfolio, the repositioning of the portfolio, what tends to happen in these market environments too, in the decline, there's not a lot of liquidity. And then as you're trying to provide it, and then on the bounce, there's more liquidity so you can make changes.
And then of course, this is why you actually don't need to go back and listen to previous episodes for this particular tip, because when you're expecting a year with volatility like we are—and we've talked a lot about all of the elements that come together, all the rationale, forget about the tariffs. You didn't necessarily know exactly what was going to trigger that volatility and additional uncertainty that leads to the volatility. But we've had the tariffs. We've had some worries about economic growth, etc., that permeate in questions about how much rate cutting there's going to be, particularly in the US. And so all of a sudden you're in an environment through 2025 where we expect volatility. And as an investor deploying money, you might want to pull out your cape.
Your dollar cost averaging cape on.
The DCA. You get your DCA shirt on with your cape and the superpower of DCA comes to help you in circumstances like this. If you were dollar cost averaging, you were buying as the market was bottoming out, even though it seemed quite distasteful. But you feel a little bit better about that right now.
Yeah, 100%. And when the market is volatile, it always helps you to have done something. So if you're feeding in to the decline, when it recovers, even though you wish you may have done more, at least you did something. The odds of keeping you on plan is a lot higher. Even in periods of time, small adjustments to the portfolio might satisfy an emotional scratch that you have, but they really don't alter the outcome over the long period of time, which is pretty important. If we can do our best to add during weakness. If we envision old highs, eventually, we know we're getting a better return on those dollars. We talked about this last time. It happens at the individual level as they add more. It happens in the portfolio with coupon and dividend interest, finding their ways into more equities at lower prices. It works through rebalancing. So there's multiple layers of tools available to the portfolio manager in these environments.
Yeah, and that's what builds the investments too. The other thing is last year was a remarkable year with respect to the lack of volatility, really, and how you were rewarded for taking on any form of risk. And I think the last month and a half has really been a good reminder that just adding risk to your portfolio at some point, you will not be rewarded for taking that risk. And that's really a shift that seems to have happened and hopefully moves us. Because when you win by just adding more and more risk, it's typically an unhealthy market. And taking some of that pressure out of the market and taking some of that froth out, ultimately leads to a healthier market where you're not concentrated in seven stocks or you don't have these meme-like stocks from that period running away. You got a broader market, a healthier market and a better base to build off from as then you look at what's happening in the macro. And again, when you really take a step back and look at it, things like copper or other things say that we're likely still in a pretty good growth period with interest rates still trending down.
Yeah, that's bang on. And also, if you look stock by stock, even though the market is corrected, there's still lots of stocks at 52-week highs. There's lots of bull markets. There's been things like gold. There's been all sorts of things that have found their way, and that will likely continue.
Well, one of our former colleagues used to talk about the Martians controlling the gold supply up on Mars. So maybe they're back buying again, and that's what's driving gold. But we won't get into that. We'll leave it there, Stu. Thanks again for your time. Another great Stu’s days. Another great investment Stu. Actually, I'll see you in London next week. We're heading back overseas again, so we'll see you there.
Yeah, looking forward to it. Thanks, Dave.