Stock Market Overview: Isaac newton’s Madness

Look at market in these days to have a general overview about what meant when Isaac Newton said that ” I could calculate the motions of the heavenly bodies, but not the madness of the people”. The S&P 500 which is considered the average of the stock market made new lower low that breaks all other previous lows and was able to retrace back to the top. It wiped all profit that made since the start of the bull move in November 7, 2016, and return back to 2967, which considered the last support before started move to what considers last bull impulse wave before the sharp dropped started in March 18, 2020 ,due to COVID-19 pandemic.

There are many contradictions between experts about the market. Some of which are considering this is a correction phase, while others consider it new bear market, and the media which is no expert in this filed consider this drop just as pump in the road.

There are several factors need to be outlined before decide where is the market going. Some of these factors are based in technical analysis while the other based in fundamental analysis. From technical analysis point of view:

  • The market makes new low and sharp drop in March 18, 2020 until it reached the bottom to 2195 points, which was below SM(200) and broke the last bottom which was in December 24, 2018 which was 2342 points.
  • This bottom was created in just 5 weeks of strong sell-off in the market.
  • After 13 weeks from that bottom, the market failed to reached to the point where all sell-off started, which means that there is high momentum in the down-side, rather than up-side.
  • The market made an Isolated Island which considered a reversal pattern below the last top which created in Feb 19, 2020 which was 3380 points. This isolated Island followed by two strong bearish candle one of which is an engulf with highest volume ever since the start of sell- off, which is a strong indication that the market will resume its down move as shown below:

From fundamental analysis point of view there are also many factors that suggested that the market is either going in sideways or down-trend but never in up-trend, and they are as follow:

  • The leading companies in the S&P 500 index which made the market moved up after its sell-off that started at March 18, 2020 which are ( Microsoft, Apple, Amazon, Facebook, Google, and Johnson & Johnson, UnitedHealth Group Incorporated, Home Depot Inc, NVIDIA Corporation, Adobe Inc) did failed to make new higher (EPS) than the previous quarters. These stocks lead S&P 500 index and went beyond it because they just report a profit, any kind of profit high or low, in time of pandemic as shown below:
Company nameEPS After(Sell off)EPS before (Sell off)
Microsoft1.41.51
Apple2.554.99
Amazon5.016.47
Facebook1.712.56
Google9.8715.35
Johnson & Johnson2.31.88
UnitedHealth Group Incorporated3.723.9
Home Depot Inc2.082.28
NVIDIA Corporation1.81.89
Adobe Inc2.452.27
Source Investing.com

As you can see in the above table, all companies failed to break (EPS) made before the Sell-off except for Johnson & Johnson and Adobe Inc. Even these two companies their EPS reported in time of pandemic still within the average of their EPS for the last four quarters before the Sell-off.

  • Companies such as Visa and MasterCard which their services did not distributed by the pandemic failed to lead the market in this stage and they are moving below S&P 500 index.
  • Netflix the company that should be one of the most companies that generated profit during this pandemic due to the lock-down made by all governments, failed to make an EPS greater than the one before the lock-down.

All these factors (either Technical or Fundamental) suggested that the up-move for the market which started March 24, 2020 is just a pullback for down-trend that started in March 18,2020 and will resume its down movement. Either way for those who already in the market investing in good companies at least from their point of view they don’t need to panic because the market eventually if either went sideways or downtrend will resume its movement to up trend and break 3300 points level and go beyond that.

For those who still have their cash I suggested that they don’t get into market until the following conditions are satisfied:

  • The market need to go down and do not break the last support point which reached in March 23,2020 which was 2195 points, and make new higher low near to that level.
  • Or the market need to go up and break the last high that made in March 19, 2020 which was 3380 points and pullback to it with failing to break it, in down move.
  • Or fluctuate around SM(200) with going up and down two times at minimum in order to make sure it is a correction phase that will end within months or maximum a year before it started moving up.
  • Also companies that suppose to lead the market should provide new (EPS) higher than the previous one in order to validate their up-movement.

Dividend Yield: how to use it to pick good stock

Before I explain the dividend yield, let me explain what is the dividend. The dividend is simply the amount of money that given to stockholder per year for owning stock on profitable company. This ranging from (0.5 $) to (20$) in some big companies. Once the company make profit each year they divided these profit over the number of shares and the result is dividend. Sometimes companies decided to distribute profit for the shareholders, but Some companies rather then distributed these dividend for shareholder, they either pay their debts which is good or make a new expansion by building new branches in order to increase their sales in future which will lead to increase their profit and (EPS) which is also good.

Dividend yield is a simple calculation which is dividing the dividend that the company distributed to shareholders , by the price of the stocks and multiply the result by 100:

Dividend Yield = ( Annual Dividend / Price of Share) * 100

To use this ratio ( dividend yield) to pick a good stocks, the only thing investor need to know is that when ever this ratio is higher than the average of ( 5 years dividend yield) the better is the company for investment. Because that means this stock which is under studying is undervalued and is a good candidate for selection.

To clarify the idea let assume that we have to companies A and B that have the following information:

 AB
Dividend yield5%3.5%
Avg. Dividend yield 5yr2.5%2%
Dividend yield

For investors that looking for undervalued company, they will chose company A over B because company A has higher dividend yield than B.

Note: in each ratio used to find undervalued companies has the price of share in the Denominator, always look for higher values.

Dividend yield can be used as (P/E). in order to end up with perfect company you need to compare it with dividend yield of other companies in the same sector as well as the dividend yield of the sector in general. Whenever you find company that had dividend yield higher than other companies and the sector in general, this company its stock price cheap compared to the profit that your are going to make form that price.