3 Secrets How To Gain A Deeper Insight Into Financial Markets

Today’s financial marktes are highly complex and interconnected playgrounds for professional and private investors.

Professional investors are also called institutional investors. This group includes investment banks, hedge funds, pension funds, money market mutual funds as well as similiar entities.

These big guys determine the overall price movement in the financial markets. Some of them, even own parts of the financial infrastructure. Private investors — like you and me — only have a small impact on the prices.

Beeing aware of this, you can use it to your advantage. Analyse the bevaviour of the major market participants. Take your results into consideration when making your own investment decision.

The key is to understand, how these institutional investors act on the marktes and how their market sentiment is.

Use the following instruments to analyse professional investor’s sentiment and behaviour:

1. PUT-Call-Ratio

The Put-Call-Ratio (PCR) is a key figure to measure the risk sentiment in the financial markets.

It is calculated as the volume of traded put options divided by the volume of traded call options. Volume is defined in numbers, not in dollars.

A call option gives the buyer the right to buy the underlying asset at a preset price.

The buyer of a call option expects the market to increase over the preset price. In this case, he is able to buy the underlying asset through the call option at a price below the market price.

A put option gives the buyer the right to sell the underlying asset at a preset price.

The buyer of a put option expects the market to decrease below the preset price. In this case he is able to sell the underlying asset through the put option at a price above market price.

You can interpret the PCR as follows:

A PCR > 1 means more investors expect the market to decrease than to increase.

A PCR = 1 means investors are indifferent about their market expectations.

A PCR < 1 means more investors expect the market to increase than to decrease.

Using and interpreting the PCR, you should benchmark it against its average. The average is somewhere between 0.9 and 1.0.

There are more specific types of Call-Put-Ratios available. These allow you to get a more detailled insight into certain market segments:

• Total PCR
• Index PCR
• Equity PCR
• Exchange Traded Products PCR
• Volatility Index PCR

2. Volatility Index

The CBOE Volatility index (VIX) was first calculated in 1993 by the Chicago Board Options Exchange (CBOE).

The VIX index is a calculation, representing a measure of constant, 30-day expected volatility of the U.S. stock market, derived from the prices of call and put options on the S&P 500 Index (the so called implied volatility).

The VIX index is calculated and publicated in real time.

Since trading with options on the CBOE requires a minimum amount of capital and a certain set of skills, the majority of the market participants are (semi)professional traders.

The VIX index reflects the level of stress in the market, the fear or panic of investors (often called the fear index in the media). You can use it, to analyse the riskiness of the overall market and to evaluate the market particpants sentiment regarding risk.

To get a better feeling for the peaks and lows, let’s take a closer look at the historical prices of the VIX.

During the financial crises 2008 and the Corona crises 2020 the VIX reached a high of about 80 points. The lowest historical support area was around 9 points.

Volatility peaks remain on a high level only for a short period of time and then collapse towards their mean.

In the past there has been a negative correlation between the S&P 500 and the VIX:

• S&P 500 increases, VIX decreases
• S&P 500 decreases, VIX increases

But have in mind that correlations can change over time. I encourage you to do your own research. The historical data of the VIX are available on the CBOE webside for download, and the historical prices of the S&P 500 are also available on financial websites. Do your own statistic research!

3. Listing of Insider Ownerships and Trades

Insider trades are only legal if they are based on publicly available information. The legal rules and definitions regarding insider deals vary across the different jurisdictions.

In general, following groups of insiders can be distingished according to the U.S. legal rules:

• Directors, officers or employees of a publicly traded company
• Individuals that own more than 10% of the shares of a company
• Entities that own more than 10% of the shares of a company

For the U.S. stock market insider deals have to be submitted to the SEC through the EDGAR filing system. Companies and individuals who are required by law to submit information to the SEC have to use EDGAR. These information are publicly available and searchable.

By analyzing the EDGAR database, you can gain information about which director has bought/sold shares of his own company.

If a director has invest a significant amount in own company’s shares, it refelects his trust in a positive future developement of the stock and vice versa.

There also other financial websites, like finviz or insider-monitor, which offer a more userfriendly interface for searching and analyzing.

The information in this article is only my personal opinion. It’s no legal advice and no investment advice. There’s no guarantee that the information is fully correct. Invest only on the basis of your own research and information.