Good evening Folks,
Whew! What a week! I love it! Every Sunday I try to forecast the high and the low for the Dow30 and last Sunday I expected an all-time low for the Dow of16,900 but the market surprised me (in a good way) to the downsidewith a low of 16,460. Within the past 2 days, the Dow was down 600 points and in August (10 days to spare), Dow is down 1,000 points or 10% from the all-time high (a loss of trillion dollars off the market) and the Dow is at a 4year low now. The volume rose to 1.3billion on the NYSE on 8/21/15. Usually when the volume goes up significantly with a decline it means that a bottom is near. I do not think that is the case.
For one reason, 8/21/15 was option expiry date and that contributed to this decline. Many weeks ago, when the Chinese market fell 30%, they lost 3 trillion dollars. Do I believe that the correction is over? No, not by a long shot; to paraphrase Winston Churchill, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”. For the past 30 years I have enjoyed Wall Street sayings. Today I heard someone say “It ain’t over till the Fed lady sings”. One Fed Governor had the audacity to come out and say that he still supports a rate hike in September. That would burst the ‘debt bubble’ and which in return would bust the ‘equity bubble’. Soros, Carl Icahn and others are betting on that scenario.
Since we had our interest rates at zero for so many years, many foreign countries and companies have got in to debt in US dollars. Let us say that the total of that debt is 10 trillion dollars; then if the dollar appreciates 10% over those currencies, all of a sudden that debt will go up to $11 trillion. Most currencies, with respect to the dollar have gone down and since these countries are our major suppliers of commodities (i.e. oil, gold) the commodity market is in a terrible bear market.
The Russian Ruble is down by 20% ! Australian dollar, South African Rand, Malaysian Ringitt are all down significantly. Most people say that this is a like a replay of the Asian crisis of 1997. Thailand started that as the Thai Baht went from 25 to 60 for one US dollar, overnight. For the past 20 years, we have been asking the Chinese to devalue the Yuan but when they started with a 2% devaluation on 8/11/15, and gradually moved in that direction, the US Treasury Secretary called the Chinese Vice Premier to give a subtle warning. As I believe, most economists agree that China got it right. The US economy is so strong that it is close to full employment and the Feds are considering a rate hike in September while the Chinese rate of growth has gone down from about 13% in 2007 to an expected rate of about 5% this year.
Most agree that the devaluation should be more. Even though the Mexican economy is doing well, due to the commodity market and China the peso is losing ground to the dollar. In the business news, I heard 101 wizards crying over the rising dollar and how the whole world (except the US) was going down. As I stated in my last month’s edition, I strongly believe that Europe’s recovery is real and it is not going in to a double dip recession so I shorted the dollar against the Euro with a Euro/USD call option-to go against the herd! I purchased that on 4/14/15 and in 4 months it is up 129% and just within the last 2 days, it went up by 81.25%. Today in the Barron’s John Higgins of Capital Economics states, “ Just a month ago, wagering on the euro a winner. Don’t expect that strength to last”. He says that the euro increased because they believe that the Feds will not increase rates in September. Sounds like someone lost money by shorting euros/USD! My options expire in 2017 and the European economy will be humming by then. Ideally I would like to see the Dow go down another 3,000 to 5,000 points. At a real market bottom, most people, especially the retail investor would get terrified and it will be the #1 leading story of ‘main street’ and not only on ‘wall street’.
On ABC News, on 8/21/5, it was one of the last items mentioned. When CNBC did a sidewalk survey, all the people said that this is just a buying opportunity. That shows that we have more to go down! Wait till people take money off their stock 401K plans. One thing I noticed today was that some call options on the Dow Jones Industrial Index were going up rather than going down. The buyers are extremely bullish! That is not an end of a correction. If it goes up again, we will re-visit this area or below pretty soon.
Remember September/October is the worst period for the market. It is when everyone gives up trying to catch a bottom that the market really makes a bottom. The market has a lot to do with mass psychology. Over the past few weeks, every time the market went up, I bought more puts as hedges. On 8/21/15 when the Dow went down 530 points my personal portfolio had a net gain of 1.6% in one day; my hedges worked! During this past week, just in 5 days, the Dow put went up by 150%, one NASDAQ put went up by 150% and the other NASDAQ put went up by 400%!! These are just hedges and not trades to make money-which is very dangerous; unless it is the Chinese market. As the short seller Jim Chanos, stated on CNBC on 8/21/15, the Chinese market is like ‘pigs on LSD’. He also stated, “Whatever you think of the Chinese economy, it is worse than that”. Many believe that the Chinese slow down is secular and not cyclical. They are going through growing pains. Just like in 2000, Silicon Valley is going overboard. According to tech expert Kara Swisher,on 8/21/5. “Everyone is awash in money”. All the crazy startups and private equity going mad over there! A few months ago, Mark Cuban made the same comment.
Nobel Laureate Robert Schiller, the #1 expert on real estate economics (he calls himself a behavioral economist), stated that he is expecting the property market bubble to burst around Silicon Valley. I agree with Schiller when he said that all that is happening in the financial market now is based on a story we tell ourselves and when the story changes, market changes. As it said in eastern philosophies, what we think of as real is only an illusion. If the market goes up from here, as I have been doing for the past month when the market went up, I will buy more puts to short the market. September is the worst month for the market and most crashes happened in October. In 1987, the market hit a high in August and then it was volatile till it crashed on 10/19/87 (“black Monday”). Will we have another black Monday on 8/24/15? I hope so. Don’t get me wrong; what I want is a good correction or a crash to clean up this over-valued market so we could have a nice bull market for the next 5 years where we could make money in a rational manner. It is abnormal to go for 8 years without a 10% correction and that is what we achieved today. 25% of the S&P 500 stocks and 35% of tech stocks are in ‘bear territory’ (down more than 10%). Many unique things happened this week. From day one, when the stock market goes down, people who sell, transfer that money in to the bond market and that did not happen today. Finally, they got wise! Otherwise, it would be like going from the frying pan to the fire as with the expected higher interest rates, you will lose your capital-it is better to be in cash for many reasons! The bond market is going to be toxic for a long time. If investing in bonds, one has to make sure of buying the actual short-term bond rather than getting in to bond funds which are extremely toxic.
When interest rates go very high, then bond funds are the best. Remember the 20%+ prime rate around 1980? Cure for stagflation. Maybe Brazil needs it to get over the current stagflation they are facing. For the past 3 years I have been asking readers to be 50% in cash to take advantage of a good correction. Most analysts would say that to get in too early with a correction is like catching a falling knife but at the same time there is no way to spot a bottom. All those analysts would say let someone else take the initial risk but most of the gain could come with the initial upsurge; and that is why if you have good stocks, you should not sell at this time. I am going to introduce you to a new strategy. As I started doing that with my last month’s edition (with Twitter), instead of buying, I want you to ‘nibble’-more about that later. Taking advantage of this correction, I want to start with a new list of stocks and a new way to list them in this newsletter. For the long run, this correction created many good opportunities.
Today the so-called ‘fear index’ (VIX) was at 28% but after watching wall street for more than 35 years, this is not fear I saw this week. On 10/19/87, the Dow fell from 2164 to 1677 (22.5% drop) and the next day it fell to 1616. However on 10/30/15, thanks to Greenspan, the market was up to 2049. Then the authorities introduced ‘circuit breakers’ and limitations on short sales and so on so now when the market goes down, it takes a long time to recover. When you allow the market to correct itself, it does it efficiently. The Chinese got the wrong message from our Feds QE1 and QE2 as well as all the market restrictions we placed. I do not think we should ban short selling. Most short sellers lose money and we can make use of their ignorance or greed to make money. One thing most people do not know about short selling is that you can lose by winning. Since you borrow the stocks to short sell, the broker can close your position by buying at the current market price and make you pay for that purchase. To make matters worse, most short sellers do that with margin (borrowed funds). When the stock moves in the opposite direction the short seller has to buy the stock to ‘cover his shorts’. So I love them! Every week I look at the mostly shorted stocks (specifically where the shorts increased within the past 5 days-available in Barron’s) and after studying the list at times I decide to go against these short sellers. It is very rewarding!
A few days I saw J C Penny on the list and it is my understanding that the worst is behind them so I decided to buy the stock but even before I did that J C Penny announced that they had a terrific quarter and their outlook on revenue was good and the share price rose from $8.07 to $8.92 within a matter of minutes! Short sellers have to pay the dividends announced by the company. The broker has to take your money and hand it over to the real owner of the stocks. About 15 years ago, I worked for a company called PMR and the CFO who became a CEO was a genius. As the company was going down due to various problems, the share price dropped from $20 to about $5. The CEO sold a part of the company and with those funds, one morning at 9am, he announced that the holders of that stock at 3pm that day would get a special dividend of $5 (100%)! Just imagine the plight of the short sellers! It got much worse, between 8am and 3pm that day, the share price rose to about $20!
All investors and traders make mistakes. Talking about mistakes, I must let you know that Warren Buffet is no longer a technophobe. For the past few years, as IBM was going down, he has been buying IBM. Probably he is betting that their artificial intelligence section (IBM Watson) will be a winner for them. So I suppose I should follow suit-not being a technophobe. One of the biggest mistakes I made was getting in to gold too early. If I did more technical analysis I would have found that it is not a good time to buy gold. The argument against gold is many folds. The rising dollar makes gold cheap as most of it come from countries with currently devalued currencies. The main argument is that when the feds increase interest rates, you can sit money in risk free treasuries and gold does not earn interest. I do not buy in to these arguments but I have some faith in the technical analysis and chart analysis.
When interest rates go up the debt bubble is going to burst overseas and that is going to have bubbles bursting in the equity markets as well as their property markets. It is a good thing that China has limitations on capital outflows as during the past 6 months they have already seen like half a trillion dollars leaving their shores. Everyone is expected to keep some gold as a part of diversification. A month or so ago, when the international fear factor was rising I was surprised that gold prices did not go up. Now I have the answer! As I have been saying in my last 2 editions, the Chinese government stopped selling on 50% of their stocks and since 90% of the account holders were uneducated people (with a grade 10 education equal to a grade 12 high school diploma in the US), they had bought stocks on margin and even borrowing against their homes. When they got margin calls, and when they could not sell what they wanted to, they sold what they could. Instead of buying gold, they were selling gold. However the situation reversed itself last week. Gold Miners were among the best gainers of last week. On 8/17/15, I purchased call option on Barrick Gold (ABX,$10,Call,Jan 2016) and now it is up by 13% in 5 days. For option trading or hedges, I use less than 5% of my portfolio-it would be too risky to do otherwise.
Now for Oil, the prices are at a 29 year old low. As I have mentioned in my previous editions, when WTI hit $45 in March 2015, I bought shares in the ETF ‘OIL’ and when it reached $60, I sold mine. WTI went up to about $62 and started sliding down again. When it hit $45 a few weeks ago I started nibbling again and I mentioned that this it might go down to $25-even though this time analysts were predicting a low of $35. Last week it went below $40 and now analysts are predicting a low of $25. Just imagine, the high for 2014 was $114. Most of all oil analysts are predicting that it will stay under $40 for 6.5years. These are the same analysts who did not see the fall of oil prices in 2014. Let us be real, for WTI to stay long below $45, the whole world has to stay in a deep recession for many years.
The US is near full employment and Europe is recovering. After debt and equity bubbles burst, US and Europe can tag along the other economies. As it used to be said, “when the US sneezes, Europe catches a cold and rest of the world gets pneumonia” (the opposite is true too). About a month ago, I start nibbling at other commodities too. On 8/9/15, long after I got in to commodities, Barron’s (best for stocks) had a front page article stating that it is time to buy commodities. I won’t say ‘buy’, I say ‘nibble’-more about that later. Last week it was reported that Fidelity Contrafund (which manages $115B and made 7% when Dow was up 3%) stated that they are bearish on commodities. This is very good news! Why? As the best stock picker to work at Fidelity, Peter Lynch said buy stocks that are ignored by institutions. Why?
As the prices go up, these funds will come back in and drive the prices way up. When it comes to commodities I am nibbling at some of the big names who have suffered a lot over the past few months; like Freeport McMoRan(down from $60 to $9.58), Alcoa (down from $40 to $8.73) and so on. One day there will be a turnaround in China too. It might take time but China will come around but the stocks will rebound before our pundits are sure of a turnaround. That is always the case.
The best way to profit from it is by going with commodities. When the Chinese economy goes up, copper will go up. I started buying a little bit of the copper ETF, COPX. Most of the gains during the past couple of years were made on momentum stocks-“trend is my friend”. I think that it deadly. As an analyst stated on 8/21/15, “Remember, at times friends can betray you”. On 8/20, when the Dow was down 350 points, one of the well-known analysts on CNBC said that the worst stock at this time is Freeport McMoRan (FCX). Unfortunately he did not check the ticker tape; that day alone FCX went up 2.67%! These analysts are mere pups; most probably during the 1987 crash, they were getting breast fed. A few weeks ago, all the media and people were whining about high oil prices and the same time Wall Street was complaining about dropping oil prices. Hmmmmm. What happened? Oil Refiner margins started going up. Have you noticed how refiner ‘accidents’ happen from time to time when WTI goes down? Excuse to raise prices at the pump? Oil refiners and oil pipeline companies who are not affected by oil prices should do okay but investors are bringing the whole sector down. Transportation stocks should do well in a low oil environment. American Airline is the only airline that does not hedge against oil prices so they benefit from low oil prices and others don’t. Delta is the exception as they own a refinery! However other airlines are immune to high oil prices as they hedge. Two months ago, the transportation index was low so I checked on airline share prices and found that most of them were down about 20% off their 52-week high.
Here is another secret: In a bull market, a good quality stock hits a 52-week high and retreats 5%+, if the fundamentals or the technical change, this is close to sure bet to buy. For shareholders, Delta is the best but I chose to buy some Southwest Airlines (LUV). Why? They have no exposure to foreign markets and foreign currencies. I bought a little bit thinking, when it goes down further I will buy more and keep lowering my average cost. It did not go down and it kept on going up. Even on last Wednesday, while the market was going down, Southwest was going up; and it was up 15% in 2 months. That is a good sign. On Friday, when it dropped2% I sold all but one share (as a tracker). Even if I did not sell it, I would have ended with a net gain of9% for 2 months. Not bad by anyone’s standards! The main reason I sold is to increase my cash position so I can make use of the opportunities that might come my way with a good correction (or better yet with a crash). Yes, now there are all kinds of golden opportunities propping up. For the individual stock recommendations, I am going to start with a clean slate with this newsletter.
Here is another Wall Street secret-Usually after a correction, market leadership changes. If you look at old leaders and plan a buying strategy, you might not find good buys. I have always been a value or a special circumstance buyer (at times, it is such a no brainer!). This time around most analysts expect the leadership to go from ‘growth’ to ‘value’. Even if that is not true, you will never lose in the long run by going with value. Last month I asked you to start nibbling at Twitter-in other words, buy 5% what you intend to end up with. Then I forgot to mention that when Twitter first came on the market, initially the price rose and then as soon as the insiders were allowed to sell (new millionaires and billionaires), the price dropped. At that point, I bought and sold when the price went up again. Now let me tell you the interesting things that happened to Twitter during the past 3 weeks (since my last newsletter). As I predicted, Twitter kept going down and that is good. When a stock is going down, all the ‘haters’ come out of the closet but when things turnaround all the ‘haters’ become overnight ‘lovers’. That goes the other way too. Till a few days ago, Apple was everyone’s darling no one could say anything wrong about it. Now even Apple is in bear territory with 20% down. They claim that the slow-down in China and rising dollar is going to be very detrimental to Apple. Jim Cramer (whom I respect) used to say ‘do not trade Apple, invest in Apple’. In other words, do not sell when it goes up or down, keep it for the long run. Then last week, while the correction going on someone asked if to buy Apple and he said no, the time is not right-“catch a falling knife”. Then I started ‘nibbling’ at Apple. In 2008 I was doing a second job at a University and this student worker asked if it was okay to buy Apple and I gave him a target price which happened later. If he bought it then, he would have made a 1,000% profit.
Now back to Twitter. On 8/10/15, Twitterinterim CEO, Co-Founder and Chairman (38 years old) and other insiders announced that they were going to buy more shares and overnight the price increased by 7%. There were some insider selling but that was done by the employees who were getting fired. Now on to another Wall Street secret: When the insiders are buying, that is a very good sign. They are not going to send good money after bad. On 8/13/15 I was watching this panel (of tech expert) discussion on Twitter and they were saying that the Twitter Board and the investors are very concerned that Dorsey is interim CEO of Twitter whilebeing CEO ofSquare which is supposed to come up with its own IPO soon. A that moment I was thinking, “Steve Jobs did the same thing”. Then one panelist had the sense to point out that Steve Jobs founded Apple, got fired from Apple, founded Pixar and when he came back, he was CEO of both companies and they all did very well. Since then as I expected Twitter has been falling. Time to nibble again! Then the next day, there was a rumor that Facebook was going to start something to compete with Twitter and people were calling it a ‘Twitter killer’. What happened? Facebook went down. IfFacebook investors liked the idea, the share price would have gone up. By the way, on Wall Street (as well as in the commodity market) and rumors go hand in hand. Even when I wrote the last newsletter, Twitter market cap was lower than what Facebook paid for Whatsapp. In fact, there are rumors that Facebook or even Google might buy Twitter.
On 8/20/15, Thursday, when the market fell 350 points, CNN came up with this breaking news, “Dow down 350 points. Twitter gets hammered”. What did I do? I nibbled (bought) a little bit more on Twitter. Then came ‘bad Friday’ the 8/21 where the market fell 530 points with 82% of the stocks going down; what happened to Twitter? It went up (not by much; like 0.22) . Now to another secret: On a big down day, if a stock goes up, it is well noting. Also on 8/21, Tech Expert, Evan Wilson, said that he is happy with what Twitter has done already on the revenue side and all they have to do is to get their users up and he was confident that it would be done. To borrow a page from another pope of Wall Street, Peter Lynch, you have the most to gain in investing in a turnaround story. Is this very risky? Yes it is so. At times, what I avoid, work against me and still it is okay to keep to my guns. To make money on Wall Street, what is important is a discipline. For example, in 2004 someone asked me if he should buy Google (you know who you are!) and I told him that I would avoid it but luckily for him, he bought it anyway. It had a PE of 80! I have never seen such an expensive stock doing well in the long run. Now, after 11 years, Google is up 1,500% and the PE has gone down to a respectable30! It is cheaper now than it was in 2004!! Now on Wall Street, Google is known as “Berkshire Hathaway” of Technology.
Another opportunity that came up last week, was when another ‘lover’ became a ‘hater’ of Wall Street; I am talking about Disney. A few months ago, when analysts could not say enough good things about Disney, one of the things they used to mention was that Disney was going to open a park in China. At that time I was thinking that this is a bad time for that. Now analysts use that also to bash Disney. However the turning point came when Disney announced disappointing revenue from ESPN which brought down Disney and all of media stocks. In 2013, I made a lot of money going in and out of Disney call options. CEO of Disney, Iger is one of the best CEOs, I have confidence in Disney but I will not be surprised if the price even drops to $50 but I already started nibbling at it on 8/21/15. Out of all the opportunities that came up during the correction (and even prior to that) is something most will not agree with me. I like going against the herd. In fact, this is ‘bluest of the bluest’ stocks in an industry that many believe that they are headed for Armageddon.
I am talking of Exxon Mobile (XOM). I just cannot praise this stock enough but start nibbling with the expectation that it might continue to go down for the next 5 years. There is a high probability that it might turnaround in 12 to 18 months but if you do not expect it, you will not get disappointed. This is the giant of the giants. It reached its all-time high of $100 on 4/1/14. So now it is down 28% to $72. It is right at the simple moving average so in the near future, it could down drastically. Most probably this is something you can keep in your portfolio for the next 30 to 50 years. Periodically you have to check to see if there is something drastic coming down the pipeline and sell it but I am confident that Exxon Mobile would be able to adjust to changes and keep prospering. A few months ago, an analyst on CNBC was showing that all these big oil companies were making so little money now that their ‘earnings per share’ was less than the expected ‘dividend per share’; and he concluded that all oil companies would freeze their dividend this year. Most, including Chevron and Shell are expected to do that. Not only Exxon Mobile paid a dividend, it also increased it (by a little bit). I personally checked their dividend history and found that every single year since 1911, they paid out a dividend! Not only that, for the past 32 years, each year, they have been increasing the dividend by an average rate of 6.4%! So I bet that they want to keep this reputation or else it would have been to their benefit to freeze the dividend and increase their cash position to get ready to buy all the hundreds of oil companies that will declare bankruptcy within the next 12 months.
In the 70’s GM had that reputation about paying out annual dividends. Hopefully what happened to GM will not happen to Exxon Mobile. Out of the original Dow 30, only GE is there today. In the 2007 recession, they came close to getting themselves out of the Dow30. So this shows that Exxon Mobile is not a sure thing. If you want a sure thing, buy US treasuries and get 2% per year. Some bozo called Donald Trump introduced you to ‘the art of the deal’; now let me introduce you to ‘the art of nibbling’. The current price of XOM is at $72. Let us say you buy 10 shares (or multiples of 10 shares) now and each time the share price goes down by another 10% by another 10 shares (or multiples of 10 shares). According to this example, if XOM goes down to $10, you would have accumulated 180 shares of XOM for the total cost of $6,227.39(plus commission). Now your average cost is $34.60! Now let us assume that kept the current dividend in terms of dollars and it took 5 years for the price to drop from $72 to $10 (which is extremely unlikely) and you purchased 36 shares per year. Believe it or not, according to these assumptions, over the 5 years, you would have received $1,598.40 in total dividends. If you factor the dividend, your total cost goes down to $4,629 and the average cost goes down to $25.72-even though the stock itself went down by 85%. Now that is Part 1 of the ‘art of nibbling’(which I just developed this week-up to this point I did not have it as a science). Now let us assume that over the next 10 years, with the dividend increasing 6% per year as they have done for the past 32 years, the share price increased 30% per year to get the price to $149-this is not unrealistic after such a rapid drop and only a 49% move up from 4/1/14. Then for that 10 year period you would have received$7,976.79 in dividends alone. Your XOM holding would be worth$ 26,824.51. Remember that during the first 5 years, your net cost was $4,629.00. If you reinvest your dividends in XOM and taking the compounded dividend and rate of growth, the potential to make money is higher. This is just an example by making so many assumptions but I was trying to create a general picture in your mind. To be realistic, I do not think that XOM will go down to $10 and it will go down for 5 years. Most probably it will start going up next year and it will hit $150 within 2 years and it will keep on increasing dividends for the next 10 years. Since the increase was less than 6% this year, they might increase it more next year to get back to the average of 6%. I already bought my first ‘nibble’. After a major correction when you do not know if we have reached the bottom, high paying dividends with real growth prospects are the best. By the way, if you buy extremely high paying dividends without doing your research, you will get hurt. For example, Linn Energy has a dividend rate of 48% per year! The current price is $2.41. Bankruptcy court, here we come! Just high paying dividend stocks (utilities, AT&T, Verizon etc.) are expected to go down after an interest rate hike by the Feds as people are expected to get the same payout from a risk free treasury. However there is a huge flaw in that argument.
When Feds start to raise interest rates, over the next few years they keep raising interest rates. Why? More and more inflation seems like a possibility; they have no choice but raise rates. Martin Zweig coined the term, “Don’t fight the Fed” after he discovered this historical trend and its impact on the financial market. So people who rush to a bond fund after the initial rate hike will find that they are going to lost their capital with future rate hikes. In the bond market, unlike the equity market, you cannot recover after you lose a big part of your capital. On the other hand, due to this correction, there are very solid companies with potential to grow with high dividends. As of 8/22/15, GM has a dividend rate of 4.7%, Ford=4.2%, GE=3.7%, Exxon(XOM)=3.9%. Let us say that you start nibbling at GM on 8/24/15 by buying 10 shares at $29.60 for a total amount of $296 (plus $8 for commission). Note that Warren Buffet owns 2.55% of GM. Now let us assume that we get this by a major market crash between now and November and the DOW drops 5,000 points and GM drops by another 50% to $14.80. Since the US market is doing well and Europe is coming back, I do not think that GM will even consider lowering its dividend. If the Feds want to lower interest rates in the future, they can always get back on the QE (quantitative easing) program by buying back bonds. So if GM falls to $14.80, their dividend rate goes up to 9% while the US Treasury is at 2% per year! Talk about a no brainer! This alone would drive investors and traders towards GM. However expect most on Wall Street to say that GM will go down to zero and they will eliminate their dividend and so on. That is how short traders make money. As Warren Buffet says, “buy when others are fearful and sell when others are greedy”.
THIS IS NOT A TIME TO BUY. IT IS A TIME TO NIBBLE. Now till November keep 50% to 75% in cash. Cash is king. What happens if GM drops to $14.80 with a further drop in the DOW of 5,000 points and you do not have any money to buy any more and you have lost 50% of the value of your 8/24/15 purchases! If you go for the big kill, the market will kill you. As an individual investor, you have a great edge over hedge funds and mutual funds. Now all the retail investors are saying that this is a buying opportunity but if the market drops another 5,000, lay people will take money off their stock mutual funds in 401K plans and so on. Then, as most funds are fully invested (they have no choice), they have to sell indiscriminately to pay their clients. Look for that opportunity and pounce! Next time we have a huge correction (25%+) or crash, we are going to see what we have never seen in our history. Can you guess? Now most of the heavily traded items on the stock market or ETFs; when we get heavy withdrawals from these ETFs, they have to sell every stock they hold without discriminating what is a good stock and what is a bad one. Apple can move the DOW as well as the technology ETF, XLK. If Apple brings down XLK, you might find some other stellar tech stocks going down for no reason and creating a great buying opportunity.
Historically, in most years, market bottom in October so some say that if you always buy an index around Falland sell around Spring, you can make money. In fact, if you bought the DOW index (thru ETF, DIA) on 10/14/14 and sold it on 5/10/15, you would have gained 12.76% while the 2 year US treasury yields 2% per year. If you bought the same index that reflects the Dow 30 index on 10/9/13 and sold on 6/9/15, you would have gained 15.29%. As I stated earlier, “trend is your friend but remember that at times friends betray you”.
After this interesting week, what is going to happen next? First of all, let me say what I would like to see. Between now and November, I would like to see the Dow30 slide down another 5,000 points. That is another 30% on the downside. With that I would like to see gold skyrocketing to2,000 per ounce (Can’t I dream?). To me, that is a solid bottom. All the experts are waiting to see what happens in China on (our) Sunday night(their Monday). Jim Kramer said that is what he does every morning when he gets up is to check on the Chinese market. I do that every night at about midnight. Maybe I used to be naïve but I noticed something very unique. Since I have puts on the Chinese market issued by western companies, I did not think that prices adjust at night but I was wrong. Once I bought some puts on the Chinese market (ASHR) and in 10hours at about midnight I found the Chinese market was down by 1% and when I checked my Fidelity account, my puts were up 50% in 10 hours!
Unfortunately I do not have access to 24 hour trading but some do. Now, back to what to expect going forward; do not expect anything just react in a pragmatic manner. As long as people talk about a ‘buying opportunity’, know that the so-called bottom was not a solid one so keep 50% in cash. When it comes to oil and commodities, surprisingly even China (yes, China!), all analysts talk as if those prices will never come up again. The probability is high that a bottom is near for those items. Happy fishing (nibbling) in the stock market and good luck!
Fernando
