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 name	EPS After(Sell off)	EPS before (Sell off)
Microsoft	1.4	1.51
Apple	2.55	4.99
Amazon	5.01	6.47
Facebook	1.71	2.56
Google	9.87	15.35
Johnson & Johnson	2.3	1.88
UnitedHealth Group Incorporated	3.72	3.9
Home Depot Inc	2.08	2.28
NVIDIA Corporation	1.8	1.89
Adobe Inc	2.45	2.27

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:

	A	B
Dividend yield	5%	3.5%
Avg. Dividend yield 5yr	2.5%	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:

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:

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.
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).
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.