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Daniel Snyder: Hey, everyone. Welcome back to ETF Spotlight. Today, we have, I’m going to call him, a legend. He’s been in this space for so long. He has quite the track record. And today we are talking about tech and AI. And you may not have heard of him, so we’re bringing him here to the forefront today. So, I want to go ahead and ask Michael McDonald to join us here in conversation.
Now, Michael, as I mentioned, you’ve been in the…
Michael McDonald: I like Daniel.
DS:…industry for quite some time. I know, I’ve seen here on Seeking Alpha, you’ve at least been within the contributor space since 2010. You’ve ran around the block here. You used to be the VP of Investments, which you say is now, Morgan Stanley. I want to ask you about that. Can you give us a little bit of, brief background of your history to how you’ve gotten to where you are today?
MM: Well, yes. I started studying the stock market back in the 1970s, and eventually became a stock broker, registered rep with a major company, actually Dean Witter and focused on the retirement area. We had aerospace people. I was from the Los Angeles area and grew the business where we got ended up with about 1,700 clients with 500 million under control in assets. And we brought all the information we had learned about the market to these clients, and they seem to appreciate it. We did pretty well. And then I retired and went into another area. I’ve always been a writer. Joined Seeking Alpha in 2000, I think, 2010. Found it interesting just to talk and keep my hand in it, and then it’s grown into what it is today.
Now, I took a leave. I think I wrote articles for about two years, 2010 to 2012, took a leave and rejoined Seeking Alpha again in 2022 with a bear market. That was a challenging period. So, and then I’ve focused on that, up to this point.
DS: Yeah. It seems like, you just can’t resist Seeking Alpha–. But I wanted to ask you because your most recent article, you dove into put buying direction, right? This form of alternative data that not everybody that follows, most people look at valuations. We look through all the metrics. We may look at the Factor Grades or the Quant Rating system here at Seeking Alpha, but you like to follow the option space data. So, I was wondering if we could dive into this a little bit. Maybe we could explain the space a little bit as, like, a high level for those who may not know, and then we can dive into specifically what you’re looking at across these ETFs and what it’s telling you of what’s to come?
MM: Sure. I’ve always focused on investor sentiment. That’s an area that I feel very comfortable in. The company is called The Sentiment King, as a matter of fact. And we believe in, especially in these kind of markets where there’s a bubble or there’s a highly speculative period where valuations don’t really apply, you need to look at investor sentiment, investors’ thoughts about the market, their expectations. So you need various metrics to measure what investors are doing in the market and what they expect to happen because I’m a great believer in the theory of contrary opinion.
So, like Warren Buffett, when everybody’s greedy, you want to get cautious. And when everybody’s fearful, you want to get very aggressive. And we believe in that, but you need metrics to measure that. It’s easy to say greed and fear, but how do you measure it? You see? And then how do you know how extreme it is? So, you need to have some kind of mathematical calculation. And these two areas actually put buying is a kind of a way to go short to market for those people who don’t know what options are.
So, you could really measure short-selling or option or put purchases, okay, to measure how negative people are about the direction of the market. And I focused on these for many, many years. The CBOE has now made it much easier to do and do it in a correct way. Chicago Board Options Exchange, they now publish the exact amount of money going into what are called directional puts. They never broke it down this fine, and it’s opened up a whole area of research that’s available now. And that is you can measure how much money are going into puts, directional puts.
You can buy puts for other purposes than the market going down, or primarily you buy puts when you think it’s going to go down, but there’s other uses for it. They separate out puts that are not directional. So that allows us to calculate how much money is going into markets or people who think the market’s going to go down. And we did that for the technology sector.
Something’s happening right now that’s very unique. I’ve never seen it happen to this degree. And the amount of directional put buying is astronomical, and yet the market hasn’t gone down. Normally, you get that after a bear market or a major decline has happened, but we’re getting it now at a high price level. And that’s very unique, and that’s what the article focused on.
DS: Yeah. So, let’s talk about this chart that you brought. And, I mean, as you can see, even recently this year, back in April, you saw what looks like a put directional buying spike in the chart here, but now you’re seeing – why don’t you walk me through this chart? I mean, obviously, everybody can see it here on screen, but why don’t you walk us through what we’re seeing here with the data?
MM: Okay. This is, I’m going to show you three charts, basically, and then update each one because that’s the interesting part. What’s happened since the article came out three or four weeks ago, and, it’s gotten more extreme? So, this first chart, really, I wanted to look at the QQQ. 64% of the QQQ stocks are technology stocks, so it’s a wonderful proxy to know what investors think the market’s going to do, okay, in the technology sector.
Now, this chart here goes back to 2018. It’s the QQQ, and you can see the bear market right in the middle there in 2022 where it went down. And you can see the huge 2.5 to 3 year rally that we’ve been in since 2022 with that April declines ticks out right away. That was about a 20%, 25% decline in the QQQ during that period. And then it bottomed and we’ve been on this tear for the last seven, eight months.
Now, on the bottom part is, put buying. This is directional put buying in the QQQ. Now, notice on the scale over here, it’s of the order of magnitude of $250 million to $300 million. So, this is a lot of money going into directional puts. So, it’s a wide statistical base. Now, you’ll notice that and we’ve used arrows to point out these moments that peaks in put buying almost always occur after a decline. Okay.
After the bear market, you can see the bear market low here in 2022, these peaks here. You can see the peak back in July 2024, and then the April one. They had these huge peaks. Well, right now we’re getting a peak. It looks like a peak. It’s not quite there yet, but it’s rising dramatically, and the market hasn’t declined. It’s fear of fear. It’s worry about something that might happen, but it hasn’t happened. Investors are positioning for it.
What we think is happening is this. There’s so much talk about an AI bubble that investors are convinced that it’s true. Therefore, they’re positioning themselves to profit when the bubble bursts and prices are going to go down. The trouble is, so many investors are doing that. It’s a sign of that it isn’t the bursting of the bubble. This is what you get prior to a consolidation period, prior to another move higher. That’s the basic theory that it’s based on and this chart shows that.
Now, I want to update this chart. The next chart is going to show you the latest data, and there you go. Now, you can see the put buying in the QQQ is almost the same as it was at the April low. It’s above the bear market low of 2022, and yet the price is still fairly high that we haven’t had much of a decline. This is very bullish. We think it represents a consolidation prior to another move higher. That’s what we…
Now, the next chart I want to focus on is actually the technology sector itself. This is a QQQ. It’s a proxy for technology. It’s not a 100% technology, but it’s a good proxy. The next chart, okay, is actually it’s called the Sector Technology ETF, XLK. It’s done by State Street, the one that produces the SPDR Index. It has 72 technology stocks in it. And, for example, it contains, Nvidia, Apple, Microsoft, Broadcom, Palantir, Advanced Micro Devices, Cisco is in there. It’s very broad based technology.
Now, if you look at this chart, we have the XLK plotted. Okay. Instead, it’s not the QQQ. This is the XLK. And below, we have the amount of directional puts going into this ETF itself. You can actually buy puts and calls in this ETF, and this measures the amount of money going into directional puts expecting this technology ETF to decline. Okay? And right here, you can see the current reading as of, when I wrote the article, it was higher than the bear market low of 2022 above the April low.
So, you have an overwhelming amount of money going into people thinking that this thing is ready to burst and going to decline. Okay? And let me update that one here. This is the latest number, and you can see it hasn’t come down much. We’re still in the record level.
So, now the third chart is, I find fascinating. You don’t see this. To get this calculation, it’s a little complicated. It took a lot of time, but it’s the most broad based measurement of directional puts in the technology sector there is, and that’s this next chart. It is the amount of money going into 661 technology stocks that trade on the CBOE. So, it’s the most broad based metric of put buying in the technology sector. You can see the amounts get up to close to, what’s that? Close to, up to $700 billion, $800 billion. Okay? If I said that correct. Yes.
And notice here the most recent number is shy of April, but it’s still rising. Okay? But I want to update this. The update’s the critical thing. Look at this update. See that? In the last three weeks, put buying in all technology stocks exceeded the April low by how much? Let’s see. About 40% above and above the bear market lows of 2022. Now, what does this mean? It means that investors feel that we are in a bubble. The bubble’s ready to burst, and they want to position themselves. They think that after this long seven month rally, we’re going to have a major correction of some type, and they’re positioning themselves to profit from that. And according to the theories that we follow, that won’t happen.
You don’t get a decline when everyone’s expecting it. So, that’s the essence of the article. Okay. And things haven’t changed yet. Okay. So the question is, we’ve been expecting a second advancing wave after this first one. We think that this indicates technology will again be the leader of another advancing wave. This is not short-term projections or forecasts. These are movements that we expect to happen over, let’s say, six months. So, we think this market’s going to continue up, especially in the technology sector, into next summer.
We think that’s what these indicators point to. I know that’s hard to believe. A lot of people think, my God, the thing is so overvalued. How can it go any higher? But it can. I was in the 2000 bubble, and prices went way beyond what anybody possibly expected to the point where people started disbelieving it was a bubble at the very top. Well, so I know valuations are high, but they’re bad timing tools. Psychology and market sentiment is a much better tool to time the market, these things are pointing to higher prices.
DS: Well, let me get your viewpoint on that. So, you just mentioned, sometimes the sentiment and valuations aren’t necessarily aligned with the time of when a bubble top might happen, but also in the options market, as we know, certain options expire every Friday, every month, every quarter, there’s weeklies, there’s now dailies. So, when you look at a directional put buying and this overall number of however many billions we saw there for a second ago, how do you think about the timing aspect of it?
MM: That’s an excellent question.
DS: You don’t know if it’s short-term. You don’t know if it’s long term.
MM: That’s a very, very good question because anybody who deals in the option market and statistics has to address that. Option traders are generally short-term oriented. I used to do a lot of option trading. I know. Two weeks is a long time when you’re buying options. So, we don’t take daily numbers. We average the numbers over 20 days. This turns a daily statistic somewhat into a longer-term metric.
If they are buying this many puts over this period of time, that’s enough bearish people over the time period to warrant an intermediate term indicator. So, by taking the – what you saw were average dailies over a 20-day period. So that takes it out of the short-term range and moves it into the intermediate term forecast.
DS: Got you. Okay. The 20-day rolling definitely makes sense. I appreciate you clarifying there. Michael, I’m going to go ahead and wrap it up here. We’ve gone quite a while and taken too much of your time, but everybody go follow Michael McDonald here on Seeking Alpha, if you want more of his research. He also has The Sentiment King. Dive into learning all about his, I mean, your knowledge is so vast. Where do we even begin? You’ve been around for decades on in. I can’t wait to continue to read your research. But everyone, go follow him here on Seeking Alpha.
MM: I told you I was on TV the day the market crashed in 1987. That’s a whole another story. Well, we can get into that some other day.
DS: We could have you back on for a whole another episode for that one. Absolutely.
MM: Okay.
DS: But everyone, thank you for tuning in to this week’s episode of ETF Spotlight. Go check out his most recent article. Follow this put directional buying. I can’t wait to see what happens. Six months, as you mentioned, down the road, we’ll see.
MM: I’m putting my neck out. You’re right.
DS: It’s what we all do here. So, everyone, thank you for tuning into this episode. We’ll see you here again in the next one. Take care.
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