We all want to hear your opinion on the article above: No Comments |
Correction not bear market
It is funny watching people panicking about last week market decline.
Many panic and predict bear market. Many are guessing what happens next. Some are drawing their charts drawing lines of the next decline and claiming historicity of their claim.
Claiming historical evidence and predicting the drop all the way down to 2275 indicates more a lack of studying the history than knowing history.
And ignoring broader context.
Bear markets don’t come in 2 days
Bear markets really do not start in a week or 2 days of a sharp drop. Drops are usually smaller not so violent and they are preceded by other warning signs. This market dropped suddenly and violently. Even the “we know all” media were baffled and guessing what may have caused such drop.
The bear markets are preceded by other signs which would warn you in time that bear market is coming: raising interest rates, declining corporate profits, and investors’ optimism.”
Although FED is raising rates, they are still historically low. In December 2007 interest rates were almost 5%, today, the rates are at 2.5%.
Corporate profits are raising with no sign of slowing. And investors’ optimism? They are spooked by any flow of a breeze out there. The amount of bearishness is outstanding. Many people are still sitting aside in cash, spooked by never ending predictions of bear market coming “tomorrow”. According to AAII 63% of regular investors are neutral to bearish. Only about 35% are bullish.
Add to it fear of valuation, trade war, political comments of the President, FED intervention, and fear of slow down in China, Italy, Greece, Egypt and others. The markets do not turn bear upon fears. Corrections? Yes, they do.
Fundamentally, this bear market is not showing signs of being rolling over.
Technically, this market is not showing any signs of a rollover either.
Look at the following charts with simple moving averages from 1930, 2000, and 2007, in comparison with 2018. Do they look same or similar?
If you think that they are same then yes, the bear market is coming!
But you may also need to visit an optometrist.
Some spooked investors claimed that we cannot compare long term trends with short term time frames. But the long term time frames determine the short term.
If the long term indicates that we are in a cyclical bullish trend, and in fact, we broke from a long term consolidation (24 year long) in 2016, we are more likely to see a growth than another bear market:
If you know in what cycle the market is you may rest calm about any corrections or short term bear markets. I recommend watching a video made by Chris Ciovacco analizing the market from a distance. This definitely helps not to panic and stay the course when selling like this happens:
Corrections are healthy and needed for the stock market to go higher. There is no need to panic. However, there is a need to watch the market because although fundamental and technical reasons for this bullish market hasn’t changed it may change any day. and it will change for sure. But be assured that you will be able to react to the change. The rollover of the market is a process and it takes days and months before you see the market making bearish moves. Last week’s movement wasn’t it, yet.
We all want to hear your opinion on the article above: No Comments |
Gut wrenching volatility
A volatility in the stock markets is normal. It is a part of it. When looking in the rear mirror and see all those drops we think: “it is all OK and normal.”
But experiencing such volatility in real time is painful and… gut wrenching.
Many people can’t take the pain. I must admit, I too feel sick to the bottom of my stomach when my own cash is involved in this market which is eating it up. But I keep saying myself: volatility is normal, volatility happens. It must happen.
And when it happens we panic. And sell and run away.
I have experienced investors in our group who couldn’t take it and bailed out.
For the last 7 days the stock market was in a selling mode. First few days were slow and markets rallied at the end of the trading session. It didn’t recover the losses though, just rallied, creating nice tails. At first it looked like we had a small dip.
But last two days – Wednesday, October 10, the market lost the support and tanked hard. It lost 94 point or -3.36%!! On Thursday, October 11th the market again looked like it might recover. In the afternoon, selling sped up and S&P lost another -2.06% !!
At first, I expected the market to honor a support at 2875, which was January high, the market smashed below. I expected it to honor another support at 2801 level. It didn’t hold.
The 50% Fibonacci retracement at 2745. The market breached that level today.
The selling was sharp and ugly.
What to do when the market sells off like this?
There are two types of volatility out there: volatility to ignore and volatility to respect.
In order to know what to do, an investor needs to step away from day to day charts and look at higher time frames. And doing so today, you will see that we are clearly in a secular bull market.
If you think that this selling is the beginning of a bear market then know that bear markets never happen in two days, bear market sneaks in slowly before it hits hard and it takes for a long time of selling, not just 7 days. Knowing that we are in a long term secular market and knowing that we just saw 7 days of selling will help you determine whether to ignore or respect today’s volatility.
As a stock investor, knowing that this is just a retracement, an expected correction, you do nothing! Stay calm, hold your stocks, and buy more shares! This is a gut wrenching volatility for sure but not a roll over to a bear market. Not yet!
As an option trader, it is a bit more complicated. Options are instruments which have limited life time. They expire. You do not want to get caught deep in the money at expiration or be assigned early. Then close the trade or roll it. I prefer rolling it. Roll it far away and sell offsetting calls, or keep selling calls to collect as much premium as possible.
With corrections like this, you want to move your options far away to give the market time to repair and eventually the price will come to your puts and you will be safe again.
The following table shows all corrections since 2009 lows. They happen, they may be ugly, but they eventually recover. Some sooner, some take longer:
Also, note May 2, 2011 to October 4, 2011 drop. The market declined -21.6% during that period of time. By definition, a 20% drop in stock prices indicates the market to be in a bear market!
So, if someone will be telling you that this bull market is the longest bull in history, lasting more than a decade, then that person is ignorant. We had a bear market in 2011. So this bull market is only approximately 7 years old. It still can last another 10 years. With gut wrenching volatility.
We all want to hear your opinion on the article above: No Comments |
Buying dividend stocks out right or timing the entry?
There are two camps among the dividend growth investors. One camp represent an idea that over the long run, it doesn’t matter whether you buy the stocks out right. As long as you keep buying regularly and for the next 20 years, the difference is negligible.
The second camp advocates calculating the fair value and time the entry to get a better price of entry.
For many years I belonged to the first camp. I used to buy a small amount of shares (as long as it was commission feasible) and did it regularly. It was mostly because I didn’t know how to obtain the proper data and information to calculate the fair value, to determine whether a stock is undervalued or over-valued. What seemed undervalued to me was undervalued to others. So I gave up looking for a better entry points. It all looked to me as a game of dreamland-style data.
While searching for a method how to evaluate stock I got many confusing numbers, results, and conflicting methods. It made absolutely no sense to me and I couldn’t see any consistency in the effort of searching for a fair value.
As time went by, I realized that you need to find a method you feel comfortable with, create the rules based on that one method and then rigorously ignore everything else.
To illustrate the point, I followed a few methods – fair value calculated by Dividends4life, author and owner of dividend growth stocks blog who makes great analysis of several dividend growth stocks. If you are new to dividend growth stocks investing I strongly recommend you following D4L’s blog and read his analysis.
The second method was Graham formula and then my own method.
For example, Automatic Data Processing Inc (ADP) Graham number is $50.33, D4L’s calculated fair value is $108.86, and my own calculated fair value is $124.24.
So, which is it?
Well, pick a method and stick to it with meticulous consistency. It will make you no good jumping from one calculation to another. Pick one method and stick to it.
Over time, I created my own screener added my formulas and now stick to it.
What is in it? I use three criteria to determine whether a stock is a “buy” or not.
The first criteria is a fair value:
The screener uses the following inputs: Next 5 year EPS growth estimate consensus, forward P/E, current EPS, dividend rate, dividend growth over the next 5 years, desired minimum annual return on investment, and payout ratio. Using these inputs I calculate my fair value.
The second criteria is that the stock must retreat and trade 10% or more below its 52 week high.
And the third criteria is that the stocks current dividend yield must be higher than the 5 year average dividend rate. We know that if the stock price goes down, the dividend yield goes up. If it exceeds 5 year average, the stock can be considered undervalued.
If all three criteria are met at the same time, the stock becomes a “buy”. In the watch list / screener such stock is displayed in a column “Trd?” and is highlighted in green.
Here is how the current result looks like today:
The watch list now updates automatically. Inputs for calculations are automatically imported from web sites such as Finviz, Yahoo Finance, Google, and other financial portals, loaded into formulas and results are displayed. Now all you need to do is to wait when a stock appears as “undervalued” or a “buy” in the column “Trd?” and buy.
This watch list can make your investing easier too. You can follow the watch list and keep investing on your own. If you want, you can send us a request for a stock addition and we will add your dividend growth stock into our watch list and you can keep following your stock in the screener.
We invest our options proceeds. We trade options, collect premiums, and invest 50% of the premiums into the dividend growth stocks from the watch list above. This is a fulfillment of my dream – create a stream of income which can be invested into stocks. This is what I striven to create since 2006 when I started investing into dividend growth stocks.
Investing into stocks by “timing” entry by waiting for the proper time to buy as advocated by Benjamin Graham or Warren Buffett, I already see good results. Once we started managing our own former 401k, now self directed IRA account and using the above described strategy our dividend growth stocks quickly delivered over 8% capital gain since November 2017 when we purchased the very first dividend growth stock vs 6.47% S&P 500 index gain. Add dividends income on top of this gain (currently 0.33% additional income) and this is a market beating result:
We all want to hear your opinion on the article above: 7 Comments |
Recent Comments