Monthly Archives: December 2018

Dec 20

How even a bull could tell something was wrong

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

Thursday was another brutal session for the S&P 500, and we now find ourselves 16% under the October highs. The latest fears stem from Trump’s threats to shut down the government if Congress doesn’t fund his wall. These headlines pile on the already fragile sentiment brought on by Trump’s trade war and the Fed’s latest round of rate hikes.

October’s stock crash was initially triggered by a spike 10-year Treasury rates. The ironic thing is interest rates have done nothing but tumble since then. But despite the reprieve in rates, the market has not been able to find its footing given the relentless barrage of bad news. In addition to the problems I already mentioned, Trump’s trade war is slowing global growth, and the US had a high profile Chinese executive arrested. Mix in fears the US economy is overheating, contracting, or somehow doing both at the same time and it becomes the perfect cocktail for impulsive herd selling.

I will be the first to admit I never expected the dip to get this carried away. But this isn’t a surprise. The market has a nasty habit of pushing things so much further than what is reasonable. And clearly that is the case here.

But just because I’m bullish doesn’t prevent me from profiting from this dip. While the initial selloff caught me off guard, the subsequent volatility created a rich hunting ground. I told readers in October that too much damage was done to sentiment in the first round of the selloff and we should not expect a quick return to the highs. That told us to greet every rebound with suspicion and be taking profits, not chasing prices higher. And the same applied to each dip, rather than sell the fear, I was buying it. Buy the dip. Sell the rip. Repeat.

I was, and continue to be bullish, so that made me reluctant to short the bounces, but even just buying the dips has been quite profitable and the extreme volatility allowed me to do in hours what it took weeks to achieve in a slower market. But even though I was bullish, I still had key levels I was watching. Last week after the market closed at 2,650, I wrote the post, “What this market needs to do to keep my faith“:

“the last three day’s has seen early gains fizzle and we closed well under the intraday highs. Multiple weak closes is never an encouraging sign. And as usual, the market is giving us conflicting signals. It is up to us to determine what it means.

I really like how decisively the market held support this week. But I’m disappointed we couldn’t add to those gains and these weak closes are a concern. What does this mean for what comes next? Unfortunately, this is one of those situations where we don’t have enough information and we need to see what the market does next.

A decisive rally Friday tells us all is well and we are on our way back up to 2,800. But a fourth weak close means a near-term test of 2,600 is ahead.”

The next day the market gave up early gains and finished flat. That warned us something was wrong and we should avoid the market. A day later, prices stumbled to 2,600 support and it’s been downhill ever since.

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But that was then and this is now. What readers really want to know is what comes next.

While I like these discounts, the looming holidays complicate the situation. What would normally be an attractive buying opportunity might struggle to get off the ground since big money already left for Aspen. Their absence puts impulsive retail investors in charge and that is rarely a good thing. Luckily, these little guys have small accounts and their emotional buying and selling cannot take us very far.

We saw similar emotional selling knock 100 points off the market during the Thanksgiving week. But a few days after the holiday, the market rallied 170-points when big money returned to work and started snapping up the discounts. No doubt we could see the same thing this time around. Unfortunately, January’s reprieve is still a ways off and until then we are subject to the whims of impulsive retail traders. But as I said, the saving graces is retail traders don’t have a lot of money and it won’t take them long to run out of things to sell. Once they’re out, the selling pressure evaporates and prices stabilize.

Or we could run around like chickens with our head cut off. You decide.

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Dec 19

CMU: Bad Luck Brian buys the dot-com bubble

By Jani Ziedins | Free CMU

Cracked.Market University

If I asked a crowd what was the absolute worst time to start investing over the last few decades, no doubt the most common answer would be at the top of the dot-com bubble. Everyone knows the story. The tech-heavy NASDAQ peaked in March 2000 above 5,000, and it took another 14 agonizing years before the NASDAQ returned to those highs. In the meantime, the Nasdaq plunged more than 70% from those heady highs.

So exactly how bad would it be to start investing at the peak of the dot-com bubble? Let’s find out. For this exercise, we recruited Bad Luck Brian. In 2000, he graduated from college with an engineering degree and landed his first real job in March 2000. Following the advice of everyone around him, he started investing in the tech-heavy Nasdaq. He told human resources to take $500 out each month and put it into a zero-cost Nasdaq index fund.

And true to his name, Bad Luck Brian promptly forgot about his recurring investments in tech stocks. While the smart people were pulling out of their investments during the bloody tech collapse and subsequent recession, Brian continued throwing $500 away every month. He was buying the Nasdaq as it tumbled -10%, -20%, -30%, -40%, -50%, -60% and he even bought when the selling climaxed at -70%. What an idiot, right?

So given how unlucky Brian is, how horribly awful did his investment turn out? The attached chart shows his returns versus the Nasdaq. As expected, the first few years were terrible. Brian lost more than 40% his principle in those early years. But even then something strange was happening. Even though the Nasdaq kept falling, Brian’s losses were consistently smaller than the Nasdaq’s. When the index was 70% under the highs, Brian was only down 40%. While no one wants to be down 40%, that is definitely better than -70%.

And the outperformance didn’t stop there. Believe it or not, Brian’s account actually reached break-even in November of 2003, more than a decade before the Nasdaq could do the same. How could this be?

No doubt many of you already realized why Brian’s account was performing so much better than the Nasdaq. That’s because he kept buying the dip. With every paycheck, he stuck more money into the market. And the further the Nasdaq fell, the more stock Brian was buying.

If we assume one share of the Nasdaq fund cost 1/10th of the index value, with his first $500 in March of 2000, Brian bought approximately 10 shares.  But the next March after the index collapses 55%, Brian’s $500 bought more than 20 shares. In fact, the Nasdaq fell so far that at one point Brian’s $500 was buying nearly 40 shares a month!

And lucky for Brian, he kept buying those discounted Nasdaq shares for more than a decade. Accumulating 20 and 30 shares per month started paying off handsomely when the index finally climbed out of its hole. By the time the Nasdaq recovered to the old highs in 2015, Brian had been able to buy so many shares at a discount that his $93,000 of invested principle was worth $204,000! The index was flat, but amazingly Brian was up 120%!

And it didn’t stop there. Brian kept plugging away and just a few years later, Brian’s $500 per month in 2018 is now worth more than $300,000! Not bad for someone who started investing at the worst time imaginable.

What can we learn from Bad Luck Brian’s? Instead of fearing dips, we should embrace them. Rather than pull back on our contributions, we should double them.

Currently, the stock market is down 15% from the highs and people are running around scared. While they are afraid prices could fall even further, I’m over here wishing we could be that lucky. Bring on those cheap stocks!

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Dec 18

Has anything changed?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

It’s been another rough stretch for the S&P 500 as prices tumbled to the lowest levels of the year. Monday crashed through 2,600 support, triggering an avalanche of defensive selling that didn’t stop until we fell another 50-points. Tuesday was a little bit better since prices closed unchanged, but that disguised the fact early gains didn’t stick and we stumbled back to breakeven. Few things are more disheartening than fizzled rebounds.

Bears want us to run screaming from this market because it is so obviously doomed. Unfortunately for them, they are living in the rearview mirror. They are beating their chest over what has happened. But in the market, we only profit from what is ahead of us. Currently, the market rests 13% under the 2018 highs. The question we need to be asking is if it better to be selling these discounts, or buying them?

A quick history lesson. The S&P 500 has only fallen more than 15% from all-time highs 11 times. The last two times were the dot-com bubble and the 2008 financial crisis. Do current conditions resemble the dot-com bubble where average p/e’s of tech companies were nearly 100? Or the financial crisis where the entire banking sector was so overleveraged it nearly went out of business? Some people think so and clearly they should be selling everything they own and burying it in the backyard. But for the rest of us, do we really believe the economy is on the verge of a collapse that has only been seen a handful of times over the last seven decades???

No doubt bears will crow that I was bullish two months ago in October when the market dipped to 2,600 support, and then again when it fell to the low 2,600s in November. I guess they were right since we now find ourselves under those levels. But the thing to note is it took two full months to fall another 50-points. That’s less than one-point per day. Wow, terrifying stuff!!!

While bulls and bears have been arguing passionately over who is right, I have been quietly grinding out profits riding the waves between these two extremes. I even wrote about it a couple of weeks ago in a post titled “Q: Who is right, Bulls or Bears? A: Neither!

“It is shocking to see the amount of gloating going on every time the market moves to one edge of the trading range or the other. We’ve been bouncing between 2,600 and 2,800 for most of the last two months. Today’s dip and reversal count as the 7th time the market challenged and failed to break out of this range.

But rather than use “common” sense and assume each dip is a great buying opportunity, or rally a time to take profits, these impulsive bulls and bears ignore the evidence and proclaim this is finally the big move they’ve been waiting for. Monday it was the bulls. Today it was the bears. And both sides got it exactly wrong.”

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Has anything changed? No, of course not. Bears are as confident as ever, and bulls are cowering in the corner. This is a mirror image of two weeks ago when the market was challenging 2,800. The last seven times bulls and bears were bragging about their success, the market reversed ran them over. Will this time be any different? No, probably not. But I don’t mind. I will continue betting against the crowd, and so should you.

While I like these discounts, the looming Christmas and New Years holidays complicate the situation. What would normally be an attractive buying opportunity might struggle to get off the ground since big money is leaving for vacation. That puts impulsive retail investors in charge and that is rarely a good thing. Luckily, these little guys have small accounts and their emotional buying and selling doesn’t go very far. We saw the emotional selling from Thanksgiving week erased the following week when big money returned to work. And the same could happen here.

Most likely the market will muddle into year end and the bigger bounce won’t happen until January. That is if nothing significant occurs between now and then. The one big thing that could happen is the Fed backing away from the widely expected rate hike on Wednesday. That would send the market surging higher. But if that doesn’t happen, expect the market to muddle along between 2,500 and 2,600 for the next two weeks. After that, if the financial world doesn’t collapse, expect the market to recover from these oversold levels as reality turn out far less bad than feared.

In my long-term investments, I love buying these discounts and hope prices fall even further so I can buy even more. In my shorter-term trading account, I would rather be buying these discounts than selling them, but I’m not eager to rush in ahead of what could be a volatile holiday.

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