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Trading Diary #5 – stock market in confirmed downtrend

As I wrote in my last trading diary #4 the market struggled to break the downtrend line.

Here is a chart I posted the other day to show my point stating that the market had to break above the line (marked with blue arrows):

 
SPX trend struggle
 

Back then the stock market still had a chance to move higher.

But fast forward and see what the market looks like today:

 
SPX trend struggle today
 

As is apparent from above chart, the stock market failed to break the line and instead it is creating new lower highs and lower lows.

Until this reverses we are in a short term bearish mode.

In our Facebook trading group, I posted a chart explaining to our members that the stock market was also in a descending triangle.

I am not much into charting and pattern analysis as I mostly do not use them, but from what I could find, descending triangles are generally bearish patterns but they can also serve as continuation pattern.

That was my expectation too:

 
SPX triangle
 

As is apparent from the latest stock market price action, the trend failed to break up in a continuation way and rather broke down, confirming this pattern to be a bearish one.

Again, expect this market going lower.

But note, this is not a prediction. All this can change tomorrow morning on a dime and we can rally making this spike below the trend line a bear trap!

You know me, I do not predict the market! But mere stating the current situation.

 

 · What to expect if this market continues down?

 

If we are heading down, then as a dividend growth investor, I consider this a good move. I will be buying more dividend stocks for cheaper price. As you know, dividend investors should not pay attention to the stock value in their portfolio but their dividend income. The only time I care about the value of stocks is when I am buying shares. I want to be buying cheap. Other than that, I only care for the dividend income.

If I invested $20,000 dollars in my dividend income portfolio and that portfolio generates $1,100 in dividends annual income, then I do not care if the portfolio drops to $10,000 dollars.

This is something many fails to understand and think that I am crazy.

But as long as my now $10,000 portfolio still generates $1,100 in dividends, I really do not worry. Why?

 
1) I keep reinvesting the dividends in high quality dividend stocks which are now at 50% of their price.
2) When the stocks start recovering again those shares I purchased at 50% discount will help my portfolio recover twice as fast as those investors who panicked, sold, and entered late into a new rally.
 

Keep in mind, no crisis or sell off lasts forever. Even the 2008 Great Recession lasted for only one year and a half.

Here is a JNJ stock 20 year chart with removed dates and values. Can you spot the 2008 Great Recession?

 
JNJ 20 year chart
 

As you can see, on the 20 year chart (and 20 years is how much I still have until retirement, so I will be invested in the next two decades), even the Great Recession is a mere insignificant blip. So why bother today?
 

As an option trader I also do not worry much about the direction of the market. As long as the stock market and stocks I use to trade options are descending in an “orderly manner” – so no violent panic selloffs I do not worry at all. I trade strangles and strangles allow me to trade relatively safely both directions.

In growing market I worry about my call side of the strangles, in bear market I worry about my put side. So I do not mind switching between directions of the stock market.

The biggest enemy of naked strangles is a sudden move in either direction. Although manageable, they can cause troubles to navigate our trades.

If, however, we get none of the violent move, I do not care where the stock market or stocks go.

Let’s see what the next week brings and good luck!
 





4 responses to “Trading Diary #5 – stock market in confirmed downtrend”

  1. ambertree says:

    Good description of the needed attitude for aDGI investor

  2. Stalflare says:

    CIao Mart,

    Love the graphs I wish I had more technical knowledge on those, unfortunately I am self taught there and I tend to miss many points when it comes to technical analysis… ANYWAYS no big deal, yes it seems that markets all over the world are taking a bit of a pause, but as you pointed out at the end of the post being a dividend seeker this is not a huge concern as what matters is the Yield that the portfolio can create, not so much the actual value of it.

    Thanks for sharing and ciao!

    Stal

    • Martin says:

      I am not much into charting either. I always have it wrong. So these are just basics. But you are right, as DGI I actually am happy seeing the market going down.

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