The new Bull Market: Get Ready

Many people missed the bull market that started at the beginning of 2009 and almost end at the beginning of 2020 due coronavirus crisis. That bull market took the DOW 30 index from its bottom which hit in March 2009 and was 7000 points and did not stop until it reached 30,000 in January 2020. This index moved about 23,000 points and made a profit of more than 328% in almost 11 years. The same is true for S&P 500 index which moved from its bottom that hit in the same date, which was 700 points until it reached 3400 points in January 2020, which means that it made 2700 points as a profit that almost 380%.

Both major indexes made a profit of about 320% or more, which means that if some one at that year of 2009 invested about 10,000$, then within almost 10 years she will made about 32,000$ as profit, and if she invested about 100,000$ then she will end up with about 320,000$ in profit. So what all of that is have to do with market toady and coronavirus crisis and 2020.

Coronaviruse Crisis hit the market so deep and started huge sell off pressure in February 2020, when all stocks have been drooped almost around 20% of its prices or more. This can be either one of two cases. The first of which is market starting correction phase which means the it will move in side-way for almost a year or so failed to make new highs as well as supported by investors whom prevent it from making new lows. While the second case is market staring new bear move which means that it will make new drops and not able to make new highs. Both cases will not last for long. The correction phase may become shorter than the bear market phase, but both of them are good opportunity for investing. Because both of them having an opportunity to by good stocks with cheap prices.

What should people who missed 2009 Bull Market do in order to take advantage of the Coming  opportunity?

There are two types of people based in their knowledge about stock market which are as following:

  • People who have no clue about stock market (Type I).
  • People who have knowledge about stock market and know how to invest and make fundamental and technical analysis (type II).

Type I people should not be worried about their lack of knowledge in financial market specially in stock market, because their lack of knowledge might be their strength. The reason is that a lot of expert in this field is trying to spot the bottom to ride the wave of new bull market and failed to do so. While those who has no clue about stock market they don’t need to bother them-self about market tops or bottoms. They can easily open an account in any fund that invest in DOW 30 and/or S&P 500 indexes such as:

  1. Fidelity ZERO Large Cap Index.
  2. Vanguard S&P 500 ETF.
  3. SPDR S&P 500 ETF Trust.
  4. iShares Core S&P 500 ETF.
  5. Schwab S&P 500 Index Fund.

Once they invest in these mutual fund, they will be riding the next bull market and this will happen when the correction phase or bear market finish and market start break the top that made in January 2020, and start moved up and make new tops that might be 60,000 or 90,000 or more than that. But to get rewarded properly in this investment, people who used this approach must hold their position for almost 10 years or so. And they should only invest with money they can afford and get no loans. Also they should use money they don’t need it for the coming 10 years.

Type II those are who know stock market and how to read charts and do some fundamentals and technical analysis regrading any company and its stock to know which stock is the best and when will be the good time for entering and exiting an investment, I have some tips for them – they might go for the tip that provided for Type I – and they are as below:

  1. If you know how to short stocks and familiar with this type of trade, then go ahead and do it, but you have to make sure to read candle properly and the volume that made it, in order to spot a good entry and exit and made some profit while the market is dropping.
  2. If you want to buy the market and go long, never do that until both Dow 30 and S&P 500 indexes made bullish candle in monthly time frame with higher volume than all precedent candles (specialty the red one).
  3. Do not buy good companies while there are best one, and to know which one is the best:
    1. Go to earning report and see which companies are able to make huge profit in the time of crisis.
    2. Companies that have perfect earning reports should move in advance of the index, for example if the index made the bullish candle in (2) and still did not break its MA(50), and the stock that you are willing to buy is already cross above MA(50) then this is a good sign that this stock is a leading one and it will be good if you invest in it since it might be the leader of the new bull market.

Both type of people should be prepared for the next bull market which might start after one year from now or so, and they should save some cash to invest in stock market because it’s the only place that can allow you to be shareholder in best companies in the world and provide you with more than 300% return on investment or more.

The One Strategy that might save your Money

All investors and traders alike knew Warren Buffet the Oracle of Omaha. This guy has been listed in Forbes billionaires list as one of the most wealthiest people in the world for 25 years. He could not do this without unique criteria that make him different than others who work with him in the same field. One of those criteria that made Warren buffet the man that we knew today is that he is capable to distinguish between the asset price and its value. For example, if he want to buy stocks in a company, he will first study the company to determine its value and how much cash this company are capable to generate in the coming 20 or more years. Once he end up his calculation and come up with a value for that company, he then see what is the price that value listed for (stock price). If the price is too high that cannot justify the value then he will pass this investment. But if the price of the stock was reasonable for the value or was so cheap he will ask himself another question before he invest and this question is the one that distinguish him form all other.

He will sit a side and ask himself this question: (If I – Warren Buffet – have only 20 investment chances in my life, would I loss one of them to invest in this company?). If the answer was yes he then will invest in this company, but if he see there is no chance to waste one of his 20 chances to invest in this company, he will stop right there and look for another opportunity to invest in it.

This question is telling us that how easy for Warren Buffet to skip an opportunity while it seems good investment for that time been and capable to control himself and his greed. That what make him skip investing in the dot com companies which was the reason for the financial crisis that hit the stocks markets at the end 1999 and the beginning of 2000. It is not an easy for investors and traders to pass an opportunity and did not take it once its arise which is the reason why there is no investors or trader make a fortune like the one Warren Buffet did.

This question that Warren Buffet used is working as filter for the good chances that he counter. When you dig deep and see how much investors and traders losing money chasing each chance appear in front of them looking for profit in short term you know why this question is so important.

To explain it clearly let assume that an investors who studied a company and went through its financial records and see everything is fine with it, then he decided immediately to invest in that company or may be wait for good technical indicator signal to buy its stock. This investors think only in one mind set which is buying this stock because its company has good financial records. He did not think in the other direction which is why I should not buy this stock even if its company shows good financial records and it is a good opportunity to invest. If she think carefully in this mind set – to not invest in a company where it seems good opportunity – she might end up with good reason or two or may be more why she should skip this investment and look for other opportunity.

The lesson form this for investors and traders is not to skip any opportunity they did due diligence about investing in it. The lesson is to think about any chance arise in front of them twice in different mind set, the first of which is why they should invest in it, and the second of which is why they should skip this investment even when it seems good one, as pros and cons for investing or trading this opportunity. Once pros is higher than cons then they are free to invest or trade this chance, but once the cons is greater than pros then they need to pass this opportunity and look for another one, to minimize their chances to end up in an investment that will make them little profit or even worst by wiping their money.

COVID-19 vs. S&P

Usually the stock market started its bear move as a result of financial crisis or unmanaged debt by financial institutes. That is not the case any more with fear of Corona virus (COVID-19) spreading all over the world so fast which made S&P 500 hit its lowest points since 2018 that was about 26%. This slump can be considered as a correction move if it maintain its level and did not go down more than that. But what appears to all investors that this down move will continue and no one knows where will be its next stop. All of that happen as a result of fear that made all investors started sell off process that made this drop.

That lead us to a conclusion that the bull movement of stock market which started in 2016 was based generally in greed only. Major companies at that time until now did not make any profit that justify the bull movement of their stocks. There were no new development in their products/services that can help investors bet on them. Despite that their stocks were soaring and going up without any correction except for some drops. Even the Forex market which considered the most liquidated market with around two trillion dollars per day, lack the momentum that it used to have because money has been shifted to stock market. The greed make a lot of traders who bet on prices rather than companies join the stock market and ignite the bull movement since 2016.

Now with fear factor the other part of the equation, the first part was the greed that made the bull market since 2016, we saw bloody markets with all major indices going red and drooping more than 25%. If this move continue with its momentum we will be the first to watch a financial crisis that caused by fear rather than bad debt or government money policy that never happened even in times of wars.

But this nonsense market that moving down driven by fear should be a good opportunity for wise investors who never bet on prices but good companies. What good investors should do as all previous ones did is to invest in market where people running out of it because of fear. This does not mean that an investor should jeopardize her capital and invest her money in the market right now. But she should pay attention to companies earning report and study its financial statement closely and notice any good oppurtinity for investment. Once she spot that opportunity, she should wait for the first sign of of bullish move when the price crossing up the simple moving average of (50) days and pullback. Once this happen she can then step in and invest as well as wait for her investment to be fruitful which might be one year from now where her capital might increase 100% or 200% or may be more than that.

Sales: The leading indicator to pick winning Stocks

Sales is the amount of money that companies received for selling its products and/or services. This money is usually include (cost of products/services + profit ). The cost of products/services can be the raw materials that company used to produce its products/service and human recourse as well as other assets that company had to have in order to produce its products/services and make it available in the market. The profit is the amount of money that company added to the price of products/service that it produced in order to make profit form those items. Once the number or amount of sales has been increased then that the profit will increase and once the profit increase earning per share for the company will increase (EPS). Finally, when (EPS) of company’s share increase it will be under high demand and that will lead to increase in its price which will make it go up, or keep going up if it already was moving in uptrend.

Usually increasing in sales will be leading indicator for increasing in (EPS). Wise investors will screen for stocks that has increasing in its sales for three or more quarters but its (EPS) did not change except for some positive earning. But once the (EPS) of that company which its sales was increasing for a while, jump and increase 75% or 100% or more, then the investor has two indicators tell her that this stock will rise and move in strong bullish up trend, then and only then when the (EPS) increase and confirmed the sales, investors should bet on that company’s stocks and invest in it as long as its sales maintain the same records and (EPS) fluctuate within the range of increment.

Sales is one of the leading fundamental indicators that investors usually use to predict if there will be an increasing in (EPS) for stocks. Once they spot consecutive increasing in sales but no change in (EPS) they start to prepare for investing in that company once they got the green light which is an increase in (EPS).

Also investors can use sales to justify if the increase in (EPS) of company come from its sales or it just come from cutting cost.

P/E Ratio, the true story

A lot of investors specially those who called value investors love (P/E) ratio. They believe that whenever this ratio is below certain number which let say 10, it will be a good opportunity to pick a stock and invest on it, and the opposite is true once they found that this number is above 17 or 20 it will be an expensive stock and they will prefer not to invest in it and look for some other stocks.

Let me challenge this idea and provide you with two stocks for two different companies where, the first of which the P/E was below 10 and the stock was not good investment and the second of which the P/E was above 15 or higher than that and the stocks keep going up.

  • Dell Tech, its P/E= (9.75) and its stock dropped from 67 $ to 49 $ and its keep dropping.
  • Apple Inc, its P/E = (26.4) and its stock keep going up from below 200 $ per share up to 312 $ per share and above.

Investors should read this ratio or financial indicators the way it should. It is simply divided the price of stock on its earning and provide a value. This value increase when the price increase and decrease when the earning increase which is simple math. This ratio measure how much investor should pay for higher return or earning. Once he/she found the ratio is high that means price is higher to received earning which consider an overvalued investment, on the other hand when the ratio is small that means the price is low compared to the earning which consider an undervalued investment and good opportunity for investment.

But the question is what if the market is going up and there are some companies has low (P/E) ratio. What does that told us. It means that those companies are still struggling to make money and their stocks did not worth demand form investors which will lead to decrease in stocks prices and end up with low (P/E) ratio.

Another case where the (P/E) can misguided investors is where the market going through correction phase and investors come cross some company where its (P/E) ratio has not changed for long time and they think that this company is becoming undervalued since its (P/E) ratio has low value, and when the market finished its correction phase and start going up those investors notice those stocks they bought did not move with market and once the market become moving very fast upward those stocks barley move in up trend which was only a reaction to the market movement. And once something wrong happen that affect the market negatively those stocks will not stand that and will be the first to drop. That when those investors realize that they bet in the wrong horse by using the formula which supposed to be number one in picking the undervalued stocks.

(P/E) ratio was really the most valuable indicator that used by investors but that when they were checking the price in daily or weekly basis in newspaper but not after the internet ear and so many users can engage in millions of transaction in a day in stock market.

So the question now is what can investors do in order to use this indicators correctly and avoid been invested in bad companies which they are maybe about to bankrupted?

In order to use this ratio correctly and avoid been trapped in bad company’s stock you have to use it the way it should be which are as below:

  1. First investor should list the companies that have high earning in ascending order started from low earning companies to the high earning companies. Like for example if you have three companies A,B and C and their earning per share is A = 3, B = 2 and C = 5 , you should list them as below:
    • B = 2
    • A = 3
    • C = 5
  2. These earnings should be better than the last quarter earning, which mean there should be an improvement in earning from last quarter by at least 75% because you know that earning is what matter.
  3. Let us assume that the stocks prices for each company above as below:
    • A = 20 $
    • B = 27 $
    • C = 35 $
  4. The (P/E) ratio for all above companies are as followed
    • A = 10
    • B = 9
    • C = 7
  5. Based in (P/E) ratio and how to choose the best undervalued company. Company C has lower ratio that is (7) even though its stock price is the highest price among other. That means the best minimum price investors can pay for high return is going to company C.
  6. That is not all. Investor now should compare (P/E) ratio of company C to the Sector that it belong to. If (P/E) of company C is equal to or higher than the sector (P/E) ratio that means C is one of the leading company on that sector and they should invest in it. But if C’s (P/E) ratio is way below the sector (P/E) ratio investors should know that this company is lagging company on that sector and they either should ignore this investment or wait until next quarter to see if there is an increment in company C (P/E) ratio to reach at least 9 with both increase in price and earning then they can invest in this company.

This is the right way for investors who want to use this ratio. They should use it as comparison tool between good companies which has improvement in earning, and they also should use it to indicate if the company they are about to invest in is leading company in that sector or lagging one. Also investors need to ignore this ratio or tool and never think to use it in bull market because once it used in any bull market whomever use it will end up with a company that struggle between a lot of success companies, which might be the start of this company to vanish from market.

Growth: Why its important to company’s Stock

Growth is one of the key element that investors should study carefully when they are investigating company’s financial records. It can be used as leading indicators that company earning will increase in forthcoming future. That simply because company’s growth has an ability to increase its earning, which means its earning per share (EPS) will increase and there will be a lot of demand on its stock on the market.

For example, if Company X has increase in growth like opening new stores every year in new different places, that means its sales will increase because products of that company which used to be sold in one place, now it sold in multiple places which means its sales will go up. Once sales increase the profit will increase too. And when the profit increase the earning per share of company’s stock (EPS) will increase, which make company’s stock on high demand for many financial institutes and big banks and others who want to have some of that company, that eventually make its stocks start going up in its price and start its bullish wave.

Growth is not something like earning once it released today its effect can be seen tomorrow in company’s stock price. However, when company’s growth increase for at least 25% you have to wait for the next two quarter earning reports. When you see improvement in (EPS) in the first quarter wait for the second quarter for confirmation or more better to wait for the third quarter, because this increment in (EPS) which happen in first earning report after increase in growth might be temporary but once you get confirmation on that you can invest in that company. So to make it clear:

you have to wait until you see improvement in company’s sales and earning for at least 3 consecutive quarters after an increment in its growth by 25% or higher.

But what if a company increase its growth and there was no improvement in its sales or earning for at least one year or five consecutive quarters, here the company’s growth did not reflect in its earning and/or sales which means there is something wrong in this company, and once you find something wrong in any company, that discovered by linking facts from company earning report, the smarter and wiser thing to do is to run a way and don’t invest in such company.

Earning is what matter

A lot of investors and traders searching for complex algorithms and techniques as well as advanced strategies to maximize their profit in the stock market. They go through a lot of websites and tutorials to find that piece of the puzzle to help them start making more profit in the stock market. They came to cross a lot of strategies that one of which depend only on the fundamental analysis of company financial reports that released quarterly, while the second of which depends only on technical analysis and studying the history of stock’s price to predict its future movement. Finally, the third of which tries to mix between fundamental analysis and technical analysis in order to end up with better investment or trading strategy that will maximize their profit and help them to pick the winning stock from 5000 or more.

In their journey in searching for this strategy which might help them in making a good decision in picking the winning stocks, they forgot to ask them-self the most crucial question which is why companies exist?. The importance of answering this question is the main criterion that helps people to pick the winning stocks.

Companies around the world exist for one simple reason and that is making a profit. If the company did not make a profit or keep losing money it will be obvious that this company will go out of business very soon. So those investors and traders should look for companies that make a profit and eliminate those which did not from their screening process. But there is another question to ask here which is what if the screening process end up with many companies that made a profit, How can the wining stock rightfully selected among those stocks?.

The answer to this is simple, the wining stock is the one that belongs to the company that made more profit than the rest and that profit reflected in its stock. What I mean by that is to choose the stock that its EPS ( earning per share) has been doubled since the last earning report or tripled or maybe hit new records.

In order to do this properly, investors, as well as traders, should go to the previous earning report for company under investigation, and find how much was (EPS) in last quarter, and check the current (EPS) by the time it’s released immediately, and once

current (EPS) >= 2 * previous (EPS)

then they can select these stocks and invest in it, or trade it for the coming quarter until releasing next (EPS). Once the new (EPS) is released and it is equal or greater than the (EPS) that help them choose the stock in first place, they can keep this position in this stock, but if the released (EPS) is less than the (EPS) that helped them investing in first place then they should exit this position and look for new stock to invest or trade.

To test this strategy I invite you to go through S&P 500 index and investigate the leading companies in that index such as AppleMicrosoftGoogle and Amazon, and others, to see how much did these stocks move from low prices to reach all times highs and that only happened when (EPS) of these companies have been doubled or tripled.

Stocks market is a complicated environment, and it’s controlled by supply and demand as well as greed and fear. Investors and traders don’t need to add more complex variables to this environment to choose the winning stocks. Instead, they should simplify the complexity of this market and stick to basics that will help them to choose the best stock that will maximize their profit.