Reader Letters: 5G, the VIX, Marijuana…and More
With Labor Day fast approaching, let’s dive into the mailbag (figuratively speaking). The three-day holiday marks the unofficial end of summer, a transition that seems to put many Americans in a pensive mood. At least, that’s always the sense that I get from reader letters this time of year.
Letter writing is a lost art form. Our digital society is characterized by short attention spans and an addiction to smartphone texting. It’s hard for an editor to compete with the endorphin rush people get when they hear the “ping” of an incoming text.
That’s why I’m so grateful when readers take the time and trouble to write and send me emails. Below are a few representative reader questions. I attempted to answer them with investment advice of universal applicability.
The megatrend of 5G…
“Technology stocks outperformed last year, but they’ve been getting clobbered in 2022 due to rising interest rates. Can you highlight a tech trend with sustainable momentum that will payoff over the long term?” — Joseph T.
Yes, a tech megatrend now is the roll-out of 5G, the next generation of wireless technology. 5G will pave the way for a new wave of technological advancement, which explains why so many companies both large and small are jumping onto the 5G bandwagon.
The existing standard of 4G accelerated the smartphone boom by allowing a single device to handle a multitude of functions. But 5G’s reach will extend far beyond phones.
5G will facilitate the Internet of Things by allowing several interconnected electronic devices and machines to communicate with each other instantaneously at ultra-fast speeds.
5G adoption enjoys a multi-year upward trajectory. Regardless of inflation, or rising interest rates, the momentum of 5G can’t be stopped. That spells opportunity for the shareholders of the chipmakers, telecoms, systems builders, and device makers that benefit from lightning quick connectivity.
For our report on how to profit from 5G, click here.
The influence of the VIX…
“Wall Street pundits note that Vanguard index funds aren’t influenced by the VIX index. Are exchange-traded funds influenced by the VIX? Are both influenced by algorithms and program trading?” — Grant P.
The vast majority of put and call index options that comprise the CBOE Volatility Index (VIX) are traded by institutional investors as insurance against a stock market crash. Consequently, the VIX tends to overstate downside risk during a correction and overstate optimism during a bull market.
Indirectly, both the VIX and most exchange-traded funds (ETFs) are influenced by algorithms, since selling begets more selling due to the triggering of stop-loss orders. Short sellers pile on and program trading by index ETFs must mimic the weighting of the index, which is constantly changing.
Keep in mind, the VIX is a measure of fear in the stock market. But it’s a poor predictor of the market’s future direction.
The Chicago Board Options Exchange created the VIX as a gauge of “implied volatility” in the market. It’s based on the amount of trading in near-term put and call options on the S&P 500 index.
The VIX rises when demand for put options outweighs demand for calls. Put options increase in value when the S&P 500 declines in value. The VIX falls when demand for call options outstrips demand for puts. Call options increase in value when the index goes higher.
The VIX is not a leading indicator, as many investors mistakenly believe. The VIX measures current market fear, which has been increasing as inflation gets hotter and the Federal Reserve tightens.
Home is where the money is…
“Sales and prices in the U.S. housing market have been falling. Will this sector implode and wreck the stock market?” — Roberta S.
The home remains the biggest asset for most Americans, so the stakes involved with your question are considerable.
Higher interest rates have impeded housing demand, but not crushed it. It’s true, the latest data about U.S. housing have been weak, but this bellwether sector appears to be bottoming, which would be good news for the broader market.
The jobs market is robust, wages are rising, and consumer confidence is picking up again. Major headwinds for housing have been low inventory, and higher building prices because of supply chain disruptions, but those two problems seem to be improving.
The United States of Weed…
“You’ve frequently written that marijuana is a big investment opportunity. It seems that more and more states are legalizing cannabis. Which states are the biggest markets?” — James H.
U.S. states where cannabis is legal are generating huge revenues from legal sales. In a recent report, research firm New Frontier Data estimates that in 2021 legal state markets generated over $25 billion in sales, a figure that’s on track to reach more than $43 billion by 2025.
For a breakdown of the biggest U.S. state markets and their projected sales trends into 2025, see the following graphic:
Source: New Frontier Data
With a combined 145 million Americans living across 18 states where recreational pot is legal, and 236 million living across 38 medical-use states, 44% of American adults currently have access for recreational use, and nearly three-quarters (71%) have access for medical use.
Marijuana is no longer a flashpoint of the culture wars. Weed has become a mainstream consumer product and a once-in-a-lifetime investment opportunity.
Cannabis investments confer market-beating potential and they’re a must for your portfolio. But the key is finding the right pot stocks.
That’s why I urge you to read my new book: The Wide World of Weed and Psychedelics. My book is your definitive guide for making money in the thriving cannabis and psychedelics industries. Click here for your copy.
John Persinos is the editorial director of Investing Daily. Send your letters to: firstname.lastname@example.org.