In their rush to study the price chart of their favourite financial instrument, using the same old methods and timeframe again and again, too often serious analysis flies out the window. When questioned, the usual retort is that this is their preferred method and it works for them, further discussion usually pointless.
Recently I forced myself into looking more closely at secondary indicators. Things like volume - when available - are staples for many. But then consider comparing the volume in the cash market with that of the related futures contracts, and again with the volume in certain options and whether puts or calls are more active, and exactly which strike prices. Add this together and it tells you an awful lot about how traders and investors are positioned and therefore where the faultlines lie.
Open interest is available in the futures market, and while we all know that it must be a zero sum game in that there are exactly as many buyers as sellers, the absolute levels matter and can be compared over time. Is this an instrument in vogue? And if so are too many getting too involved with stubborn positioning? In this case, the risk of a sudden rush to the exit increases with time, not just absolute price moves.
Implied volatility, and the skew between the cost of puts and calls, different strikes and maturities, is another great secondary indicator. Some might even class it as a primary indicator (absolute price) in that one is looking at the cost of insuring against a particular outcome. Again, you can see which way investors feel things ought to move, how comfortable they are in their positioning of directional trades, and can then be compared with observed volatility. It is especially useful when combined with opinion poll results.
A broader measure of volatility which many of you are probably familiar with is the Chicago Board Options Exchange Vix index. A rather rough and ready reckoner, it is the weighted average of a cluster of option strikes on the S&P 500 index. It is, however, very closely watched - usually as a knee-jerk reaction to earlier market moves. The European version is known as Vstoxx, a rolling basket of 30-day options on the top 50 shares which some consider a measure of the volatility of volatility.
Data on levels of margin debt, and in which securities, is published by some bourses. In Shanghai at the moment, according to Bloomberg Business, the sell-off has been "especially painful for margin traders as their favourite stocks sink faster than the benchmark index". Why does that not surprise me? Go-go stocks are favoured because of their enhanced upside, but don't forget that the downside is symmetrical.
Recent short selling data from the Tokyo Stock Exchange (TSE) shows that foreigners, who now make up a good portion of the market, are betting against the index at record levels. The short selling ratio on the Nikkei 225 is 38.3 per cent and 35.8 per cent on the TSE generally. Other exchanges prohibit short selling in an effort to protect their listed companies.
