Monday, March 06, 2006

Selling Sparks Some Fear

The selling really picked up in the afternoon, and it looks like the markets will close near the lows for the day. I don't think volume on the Nasdaq will be high enough to make for a second straight distribution day, but the NYSE will likely register one (it did not on Friday).

A look at the volatility index (VXN) on the Nasdaq shows a big spike higher today, meaning that there is fear creeping into the market. The put/call ratio was also higher today, though not above 1.0.

The SPX and COMP are testing support at their 50-day averages. If these give way, it increases the likelihood of a more protracted correction. So we will have to see how vigourously these levels are defended.


At 5:20 AM, Blogger binyasol said...

Hi Jordan, thank you for this informative blog. I was wondering if you could explain the difference between index mutual funds (i.e. Vanguard index funds) and ETFs and talk about which would be a better long term investment for retirement savers with long horizons and very little to invest.

At 7:34 AM, Blogger J. Kahn said...

Hi Bin.

Index funds and ETFs are similar in that they both represent a basket of stocks in which to invest. That basket could include all of the stocks in the S&P 500 Index, or a group of financial stocks, etc.

So it depends on which index or sector you desire exposure to. While Vanguard is know for low fees, many mutual funds have higher fees than ETFs. But ETFs trade like a stock, meaning you pay the same commissions as you would buying a stock.

So its hard to say which would be a better long-term investment, since both have their pros and cons. If you're going to be dollar cost averaging in, a Vanguard index fund would probably be the better bet. But for maximum flexibility, or exposure to a very certain sector, ETFs are a great way to go. Hope that helps a little.

At 7:53 AM, Blogger binyasol said...

Thanks. Allow me to ask one last question about this. I feel like ETFs carry the extra risk that once they stop being in vogue, the offering price for an ETF on the market will not reflect the total price of the underlying stocks because there will be little demand for the pre-packaged ETF (in contrast, in an index mutual fund this risk does not exist because the mutual fund company is obligated to buy your shares at book price of the underlying stocks). Does this make any sense, should it ever be a consideration?

At 7:36 AM, Blogger J. Kahn said...

I think both investments carry that risk. That is, if there are large fund outflows from investors, that puts pressure on the underlying securities that make up the fund or ETF.


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