As of 1/24/16:
As I predicted, we had a ‘dead cat bounce’ in the stock market last week. In a time like this with technical analysis we can find some direction. On 1/19/16, Carolyn Boroden the technician known as the Fibonacci Queen made some remarkable predictions on CNBC. She said that we might have a short term bottom this week at S&P 500 at 1832 but if the market goes below that we might see a world of pain and the market could go down another 20% to 30%. The very next day, the S&P 500 hit 1812 (Dow was down 550 points) for a short time with volume rising 20% and market started rising. Reaching a low with higher volume is very good as it means that the market is running out of sellers.
Ralph Acampora is one of the most respected market technicians that I have followed for decades and he is extremely pessimistic about the market right now and on 1/22/16 he made the following statements on CNBC (1) Russell 2000 or small cap stocks have been going sideways for the past 2 years and this is a very bad signal for the future (2) The stock market is tradeable but not investable (3) If the Dow Jones goes below 15,666 or the S&P500 goes below 1820, it could go down 75% - that will bring the Dow to $3900 (from over 18,000 in 2015) !! There have been many times he has been wrong too. According to some technicians, the S&P cannot go higher than 2000 for some time to come and if it falls below 1880, then the decline would start again. From 1/1/16 to 1/20/16, stock markets around the world lost $7 Trillion! This is why it is always good to have some put options on indexes as a hedge against Armageddon. Prior to August 1987 I was following technician Robert Prechter and he predicted a market top during August 1987 and severe correction during the Fall of 1987. The puts I got my dad to buy were worth $1 before the 1987 crash and after the crash they went up to $70 (7,000% gain in 4 days or so).
When the market hit a bottom I bought a few call options on the market index and within 4 hours they doubled in price. Investor sentiment is at a 30 year low so taking the contrarian view, this is bullish and good for the market. One reason why the market went up over the past few years is due to huge buyback programs of many big companies but what most people miss is that due to SEC regulations they have to put a hold on those buybacks 5 weeks prior to an earnings call so during the past few weeks when the market went down by 2,000 points these companies could not intervene with buybacks. Very soon, we will see these buybacks coming back in to the market and lifting some of these stocks.
Here are some of the companies that will have earning reports soon- (1) Haliburton on 1/26/16 will give us a good picture of the oil industry (2) Apple will report on 1/27/16 (3) Chevron will report on 1/29/16. Next week is the Super Bowl of Earning Reports! Also on 1/27/16 Janet Yellen will have their FOMC meeting. Will they soothe markets or add fuel to the fire? My concern is that this will also open the door to insiders to sell their stocks so if that happens in a big way, the market will go down more than going up. It is a wait and see situation. We are in a bear market where the main trend of the market is down and not up. In my opinion, bear markets are good as it gives opportunities for the fearless long term investors to get in to good companies and make money in the long run. Between 2010 and 2015, there were no corrections and only a handful of stocks kept creeping higher-which is very unhealthy for everyone. Most countries are in deep trouble due to recessions, currency problems, and credit problems and so on. These countries have huge sovereign funds with US stocks. Over the past few weeks they (i.e. Saudi Arabia) have been selling to meet the daily needs of their government. Over the past 7 years due to 0 Fed interest rate, emerging markets borrowed $7 Trillion in US dollars. At the time the Dow was down 550 points on 1/20/16, oil also hit a bottom of $25 and started rising sharply. On 1/21/16, oil (WTI) was up 6% and on 1/22/16, it was up 9% to $32.25 (28% from the bottom). Some say that oil has to go down to $10 or so for companies like Exxon/Chevron to cut their dividends. Recently the Saudi government came up with their 2015/2016 budget and they prepared that assuming the price of oil (Brent/WTI) at $29 per barrel.
Start nibbling at these stocks but know that initially for a long time, you might see the price decline sharply giving you opportunities to increase your holdings:
IBM- The most hated stock on the Dow Jones 30. It has been going down (Jan 2013 at $213 to $122 on 1/22/16) sharply. It has a PE of 9 while the industry average is 18 so the value is twice as much. Buy 2 share at this price, when it goes under $110 buy 3 shares and another 3 when it goes under $100 and so forth.
Schlumberger Limited (SLB)- It was a huge pleasant surprise when they had their earnings call last week. They said that they will not increase the dividend amount at this time but the dividend is safe for 2016. They also expect the price of oil to rise sharply in 2016 and the biggest surprise was that they announced a stock buyback! Most analysts were saying that even companies like Exxon and Chevron should suspend their dividend to get ready to buy when other oil companies go insolvent in 2016. Now it is trading at $65 so buy 2 shares, 2 more shares when it drops below $50, and let us keep buying as the price declines so when it goes down to $14, we can buy about 1,000 shares.
On 1/19/16, it was reported that US freight tonnage was up by 1.1%. The Chief Economist of the International Monetary Fund or IMF or the World’s Central Bank on 1/19/16 stated that the stock markets all over the world are overreacting to energy prices; and he expects global growth rate to be around 3% and that is a reduction of a mere 0.2%. China reported a growth rate of 6.9% but most believe that the real rate is around 4.5%. However as expected retail sales went up by 11% as the market is moving from manufacturing to the service sector. Banks in the US are safe due to the Volcker Rule and Frank Dodd but that cannot be said about the banks in other countries. European banks are very exposed to commodity markets and sovereign debt. There are rumors that UBS and Credit Suisse might go insolvent-if the worst happens. Even Deutsche Bank (they just reported a loss of $7.2B) could lose over $700 Billion; too big to fail but too big to be saved.
Given the information that came out, here is an update on our holdings:
Apple- As I have stated before, for many years all of Wall Street loved Apple and then a couple of months ago, all on Wall Street started hating Apple. Earnings estimates kept going down. At that time I asked you to start nibbling (buying) Apple. Last week 2 major firms issued buy recommendations on Apple. Where were they when I asked you to buy Apple? On 1/19/16, Goldman Sachs gave a buy recommendation on Apple with a future price target of $150. On 1/22/16, Gene Munster of Piper Jeffries came out with a buy recommendation on Apple with a price target of $150 in 9 months and on that day alone Apple went up by 5%. On 1/20/16, Apple hit an intraday low of $93.42 and rose to $101.42 on 1/22/16. If Apple goes to $150 in 9 months, from the low of 1/20/16, it is a 61% gain in 9 months in one of the most valuable and the biggest company in the world. Scott Kessler of S&P Capital IQ issued a very strong buy recommendation on Apple. For the past year or so everyone in the market knew that Apple was stealing employees from Tesla and as with everything else they were secretly working on a car. Elan Musk used to joke that Apple hires their fired employees. Around 1/20/16, Elan Musk stated that Apple is developing their own car. Some say that Apple should buy Tesla but Elan Musk may not be willing to sell Tesla. I personally do not think that Elan Musk would be able to stand in the way of Apple if they decide to have a hostile takeover. All insiders and 5%+ owners own only 22% of Tesla. Tesla is extremely over-valued but their market cap is at $26.5Billion and Apple’s Cash and Short Term Investments come to about $50Billion and you add NetAR and you get about $80 Billion. Can Apple buy Tesla? You do the math! In my opinion, Apple should wait for a stock market crash or the bear to make a dent in stock prices where Tesla market cap drops to about $12 Billion and then make a hostile takeover. The guy in charge of the car division at Apple resigned around 1/22/16.
Twitter-On 1/18/16, Scott Kessler of S&P Capital IQ stated that Twitter is now a value stock and expects revenue to go up by 40% this year.
Get ready for an eye opening week on Wall Street. Will the market go up more before it falls down again? Some say that this bear rally could even go on for a couple of months but remember the bear market is not over and the general trend is towards the downside. It is good to have some money in S&P 500 puts as a hedge against a huge market decline over the next 6 months. Good luck!