Tag: invest

Dow 30 Overview As March 20,2021

In my early posts I wrote about Dow 30 industrial average index and how it seems to me as overvalued compared to fair value of those stocks that included in it. Here I will list all the stocks inside the Dow 30 index and their fair values and the prices they are trading with in market. Based on the fair values of these stocks, a conclusion about if the Dow 30 is overvalued or undervalued or stable and has fair value can be made.

Company NameTicker Price of Stock Fair value of Stock
Apple IncAAPL119.9957.54
AMERICAN EXPRESS COAXP140.7111.9
BOEING COBA255.82-25.5
CATERPILLAR INCCAT225.2915.15
CISCO SYSTEMS INCCSCO48.9840.73
CHEVRON CORPORATIONCVX103.3826.33
WALT DISNEY COMPANYDIS191.1434.35
DOW INCDOW63.91114.74
GOLDMAN SACHS GROUP INCGS344.2-845
HOME DEPOT INCHD289.1313.26
INTERNATIONAL BUS MACH CORPIBM128.9375.03
INTEL CORPINTC63.766146
JOHNSON & JOHNSONJNJ160.04204.6
JPMD JPMORGAN CHASE & COJPM155.14-864
COCA-COLA COKO50.8170.6
MCDONALD’S CORPORATIONMCD222.44265.67
3M COMPANY3M188.71255.53
MERCK & CO INCMRK77.51162.31
MICROSOFT CORP.MSFT230.35141.09
NIKE INCNKE137.4923.17
PFIZER INCPFE35.5367.55
PROCTER & GAMBLE COPG128.01327.14
RAYTHEON TECHNOLOGIES CORPORATIONRTX78.3619.62
TRAVELERS COMPANIES INCTRV149.3725.6
UNITEDHEALTH GROUP INCUNH365.58576.15
VISA INCV206.982.67
VERIZON COMMUNICATIONSVZ56.24413.81
WALGREENS BOOTS ALLIANCE INCWBA52.54450
WALMART INCWMT131.74716.45
EXXON MOBIL CORPORATIONXOM56.490.25
Stocks Prices Compared to their fair values as of March 20, 2021

The above table listed all the 30 companies that are listed in Dow 30 with their prices and their fair values. There is some notes that should be clarified to make the above table reliable.

Notes:

  1. The above table is not a recommendation for any stock in any trade, if you want to buy or short any stock do your due diligence and make sure that your investing or trading systems align with the information listed above.
  2. The assumption used to estimated the fair values of all the stocks above is as if theses companies growths’ are similar to the USA GDP growth which is 2.2%.
  3. Some of the above fair values is in minus (-) which does not make sense, but it can provide a clue about how these stocks are completely overvalued.
  4. Number of overvalued companies are (14) which is have the companies in the Dow 30 index, that might be the reason why the DOW 30 still in uptrend or sideway, and traders should exercise caution if they want to short stocks in uptrend with high momentum.
  5. Traders can use their systems to look for short term deals that presented for them by market movement, investors on the other hand need to stick to stock fair value instead of its price, because even if there will be bear move the market at the end will appreciate the stock fair value and move toward it.

Stock fair value is something completely different than its price which is listed in the market that affected by the law of supply and demand. The wise investors need to distinguished between these two things and never buy stock that its price higher than its fair value and, never sell stock that its price is lower than its fair value.

Market Sentiment: How can be measured?

A lot of traders are using indexes or at least the major one to see if the market is going up or down or does not move in either way as sideways movement. This a very helpful technique that used by traders and investors to see if the market is willing to pay some profit in either way by going long or short, or if the market is not moving at all which can be better to stay out of it.

Many traders and investors alike using S&P 500 as a gauge for market sentiment to see if the market is about to have a new breakout move or continue its original one before they trade or invest in any stocks. This approach is more helpful for traders and investors because it will prevent them to invest or trade in phases where market is not going any way, or even worst when it move or start move in downtrend.

But the question to ask here, is measuring market sentiments by using S&P 500 is a good approach or there is another index that is better in measuring the market sentiment rather than S&P 500.

Before answering the above question let us understand what is S&P 500 and how can be calculated?

S&P 500 is simply an weighted average for 500 companies. These companies are the most largest companies in U.S economy. Some of those companies have higher weight than others based in their size and how big financially are such as Apple, Microsoft. As the name imply there are 500 companies in this average. Some of these companies are consider leaders of U.S Stock market, such as Apple, Microsoft, Google, Amazon, while there are so many companies that included in this index are considered a lager companies.

From statistic point of view, when the sample number is increased the average for that sample is almost coming to normal and anomaly will be disregard. To make this simple, when there is a bad companies in that average are mixed with good companies, the value of those bad companies will be disregard since their value will not affect the average specially if those companies are smaller in weight than those good one. That was the reason that S&P 500 index broke the top that made in Feb 2020 in beginning of this year, even if there were so many companies are reporting bad earning report.

S&P 500 Break Resistance

But what if the sample size is been minimized to 200 or 100 or 50 or may be 30 such as Dow 30 index. What will happen in this case?. The answer is obvious, the average will be more sensitive. That means when there is an anomaly appear, the average will effect immediately either if that anomaly was good or bad. And here comes the important to take Dow 30 index which is known as Dow jones industrial average as measurement of market sentiment.

Dow 30 consist of the biggest companies of all sectors of the stock market. It vary from technology companies to petroleum companies as well as banks and pharmaceutical companies. The variation of these biggest companies and the limitation of this average to consider only 30 biggest companies in U.S economy which make this average a unique market sentiment specially when investors or traders want to know if it is a bull or bear market.

For example, in 2020 where coronavirus pandemic started the market wiped all its profit since 2016 in just five weeks. All other indexes such as S&P 500, NASDAQ and other European indices have been recovered from that drop except the Dow 30 which still failed to reached the top that made in Feb 2020 as shown in the pictures below:

S&P 500 break the top reached in Feb 2020
NASDAQ 100 Break the top made in Feb 2020
Dow 30 failed to break the top made in Feb 2020

As we can see from the above charts there was an anomaly. These indices should be aligned with each other and broke the top made in Feb 2020 in order to prove the sell off that started in Feb 2020 has been recovered, but since Dow 30 still did not break that resistance made in Feb 2020, it will be hard to tell if the market has been recovered from coronavirus effect or not.

Alignment for all indices is important in order for traders and investors to tell if they are in bull/bear market, and Dow 30 index shows through years if the market is in uptrend, downtrend or sideways. That does not neglect the importance of S&P 500, or NASDAQ composite, they are both good tools to measure the market sentiment, but when it come to overall result, I believe Dow 30 has the final word to decide if the market is about to move either way.

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.

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.