Does Socially Responsible Investing Make Financial Sense?
When you engage in socially responsible investing you are not only rewarding ethical companies. You are also punishing companies that are not doing the right things. On the other hand, you are investing for retirement and would like for your investments to result in a comfortable retirement. In that regard, does socially responsible investing make financial sense? What are the tradeoffs when you choose ethical investments and which socially responsible investments make the best financial sense? For that matter, how did socially responsible investing begin?
Origins of Socially Responsible Investing
If you go back far enough you find socially responsible investing as part of the Jewish traditions and in the USA the Methodists two hundred years ago practiced putting their money where their beliefs were by using ethical investing practices. More recently, during the 1960s anti-war sentiment led to many taking their money out of investments with defense contractors. As this practice took hold, investors boycotted South African investments to protest and eventually help end Apartheid in South Africa. And, as public concern about the environment rose to the fore, this became an investment focus as well.
Socially Responsible Investing – Making a Difference and Making Money
Millennials who want a better world to live in and baby boomers who want to leave a better world for generations to come both are active in socially responsible investing. As more and more investors have sought ethical investments, investments funds emerged that specialized in avoiding companies they believed harmed society. Because these funds (and the investors) wanted investments and not charitable giving, two things happened. The fund managers made it clear to companies that how they acted would affect how much investment they received. And, investment funds and individual investors looked at how ethical companies stacked up in terms of profitability. It turns out that ethical companies are generally well run and well run companies are generally more profitable!
Arguments against Socially Responsible Investing
The primary argument against this approach to investing is that you are foregoing profitable investments as you put your money where your heart is instead of using tools like fundamental analysis when investing in stocks. But, another concern is that you may invest in a company that talks a great environmental and socially responsible story but really does not follow through. Likewise, you may find companies who want to do the right thing but do not have the business sense to make any money! They work to make you feel good about investing in them and feel guilty if you don’t. Being able to sort out which is which is a necessary feature of success investing consistent with your beliefs.
Difference between Impact Investing and Socially Responsible Investing
Investing your heart generally has to do with effects on social issues, the environment, or governance. There are two ways that investors approach this subject. One is that they invest in or avoid companies because of a checklist of reasons. This is socially responsible investing. Many times it has as much to do with avoiding investments as with choosing them. Another approach is that the investor wants to make a difference, have an impact. This is impact investing in which one chooses based with a specific goal in mind. Examples typically include things like investing in companies working toward clean energy solutions, toxic waste cleanup, or ways to provide economical solutions for public transportation, clean water, or healthy food.
Socially Responsible Investing and Portfolio Diversification
Portfolio diversification is a tried and true way to protect your investments against horrific loss and also lock in possibilities for impressive gains. The traditional thinking is that when one sector goes does down, others may rise as investors move their money around. This approach applies to socially responsible investing as well. In fact, many investors may choose socially neutral investments as part of their portfolio in order to ensure price stability while investing in socially responsible investments with the rest of their portfolio. For many this is a safe and responsible trade off.
Socially Responsible Investment and Sustainability
As the world of socially responsible investing has matured this has come with a widespread realization that humankind is depleting many natural resources. The apparent trend to a hotter and hotter climate causes many to worry about the sustainability of the human race. Thus, a good portion of this sort of investing is now going to things like renewable energy, desalinization and other water purification projects, and products that are biodegradable unlike plastics that hang around for centuries.
Socially Responsible Investment Products
Although many investors want to invest in socially responsible companies, it can be quite a bit a work finding specific companies that fit your needs. However, there are several investing platforms in which you can invest and have your money go into areas that you support. Each has its own unique features.
Motif
These folks allow you to purchase individual stocks. They provide information that you can use to make your selections, protect your securities up to $500,000, and don’t have any hidden fees. Choose you category of good corporate behavior, fair labor, or sustainable planet and invest with dollar amounts. Their minimum investment is $250.
OpenInvest
This is a public benefit corporation that has a well-diversified portfolio that can be used for direct investing or an IRA. Is a passive approach in which you fund your brokerage account and they handle your funds. They charge a 0.5% management fee. Their minimum investment is $100.
EarthFolio
These folks offer an automatic service dedicated to investing in funds which they label as responsible and sustainable. They describe their service as providing time-efficient, low cost, smart investing. You can use them for direct investing for your IRA, 401 (k), and other tax-deferred investments. They have a 0.5% annual fee and require a $25,000 minimum investment.
Hedgeable
If you like lots of choices, you will like these folks. They have a great deal of diversification and customization to their investing platform. Their minimum investment is $1 and their options include venture capital, bitcoin, and other alternative asset classes as well as impact causes. Their fee is 0.75% per year for accounts up to $50,000 and as low as 0.3% on accounts over $1,000,000. Other asset class fees are 1.5% or an IRA, 3.4% for a mutual fund, and 4.87% for hedge fund management.
Ellevest
Women may prefer this platform as they take the likely lifetime salary curve of a woman into account. They determine financial targets to meet your investing goals and factor in expected lifespan. There is no minimum investment amount or investment balance. Their management fee is 0.25% for the stand plan and 0.5% for a dedicated financial advisor.
Wunder Capital
These folks focus on investment in solar energy projects in the USA. They are an impact investment opportunity and aim to fund large and eco-friendly solar projects. When you gain a profit it is deposited directly into your bank account. They work with partners in solar energy, generally large outfits and actively manage their investments. Their minimum investment is $1,000 and their annual fee is 0.25%.
And, if you would like to add a few socially responsible investments to your portfolio, there are a whole host of apps that will let you screen for appropriate options.
All Option Trading Strategies
Those who buy and sell options do so in order to hedge their risk, lock in opportunities or both. In doing so, traders employ any and all option trading strategies. Your choice of one or all option trading strategies will depend on your purpose in trading, the market, and current market conditions. To help our readers sort out the reasons for using one approach versus another we offer a few useful suggestions.
What Is Difference between Options and Futures Trading?
Futures and options are similar as trading products in that they give investors the opportunity to hedge their investments and make money. But, they differ in terms of absolute risk. When you purchase an options contract you obtain the right to buy or sell shares on or before a specific date called the expiration date. However, you are under no obligation to do so. You are simply paying to have that option. The seller, on the other hand, is obligated to sell if the buyer executes the contract. Futures contracts confer the right to purchase on or before the expiration date and these contracts are not optional.
Dispersion Trading Using Options
Dispersion trading using options takes advantage of two facts. There is always a difference between implied and realized volatility when trading. And, this difference is always greater between index options as opposed to individual stocks. In this method of trading one will either buy individual stock options and sell options on an index or buy options on the index and sell individual stock options. Dispersion trading works the best, obviously, when there is low correlation between individual stocks and works poorly when correlation is high. A good example might be today’s stressed market in which the broader market rises and falls with good or bad news but individual stocks continue to perform based on their intrinsic stock value.
When Do Spy Options Stop Trading?
The SPY refers to the ETF or exchange traded fund that tracks performance of the S&P 500. You can trade options on this index during the day until 4:15 pm the settlements are based on the 4 pm market closure. Depending on the broker, you have until as late as 5 pm to get out of an option contract that has passed from being profitable to being a loser. You can trade SPY options after hours but the rules are different and liquidity goes way down. You cannot place market orders but need to place limit orders. This means you are not guaranteed an option contact. And, you had better pay close attention to your trades as positions can change more quickly and less fluidly that during the day!
Option Trading Buy Call
A call option is a good first step for new options traders. Sadly, many potential options traders are deterred by the common misconception about nine out of ten options expiring worthless. If this were true you would predictably lose money (your payment for the option on 90% of trades. However, the fact is that while three out of four options expire worthless, six out of ten are either closed by creating an offsetting position or traded out. In the end, one in ten call options is exercised. The reason for buying a call option without any other actions is that you believe the stock or other equity will go up in value between when you make your purchase and when you exercise the option. For this approach to be profitable over time you need to analyze your potential trades sufficiently well so that your total gains exceed the costs of all of the options contracts that you buy.
Trading Low Volume Options
One of the pitfalls in trading options is buying an option contract for an equity with low trading volume. If the stock trades at low volume, the price of the option contract may be irregular and hard to predict. And, if the options contracts trade at low volume you may find yourself trapped in a trade when you want to get out! Additionally, higher trading volume gives you a better sense of the movement of an equity. This is, of course, why options traders purchase options as they seek to profit from swings in price due to both fundamental and technical factors. Many traders rely on a big increase in trading volume as an indication that a large price move is in the offing while they look at a drop in volume as an indication that their trade will probably be a loser.
Trading Options on Ninjatrader
If you want to be active in trading options it is best to use a trading platform. The Ninja Trader platform has been available since 2003 offering both brokerage services and trading software. Many traders use its free market analysis, charting, and live trading functions as well as simulation trading functions. This is a very functional setup at the basic (and free) level but if you want special features like automated trading, back testing, and advanced order types you need to pay on one-time fee of about $1,000 or a monthly leasing fee of about $60. The point of using the advanced features is that these tools can make your trading more successful and profitable, but you need to learn them and use them regularly.
Best Books about Trading Options
Options trading can be quite profitable but you need to learn the necessary skills. There are three books that we recommend that will help demystify this pursuit.
Option Trading and Pricing by Sheldon Natenberg is at the top of almost everyone’s list of best books about trading options.
This book is great for beginners and pros as it outlines practical trading strategies that reduce risk as well as more advanced hedging techniques. It even tells you how tax laws affect your option trading profits!
Fundamentals of Futures and Options Markets by John Hull is our second choice.
This a good book for active option traders as it contains lots of actionable advice from an authority on risk management in trading derivatives.
Option as a Strategic Investment by Lawrence McMillan is ranked first by many experts, but we place it third.
This author provides a ton of useful information but our take is that it may be a little too much for beginners who need to start with basics and then advance to more advanced trading techniques before getting into the philosophy of options.
An often overlooked but excellent set of training tools for options trading with Japanese Candlestick Trading Signals is Stephen Bigalow’s series of options training videos on his website’s store pages.
Best Bargain Investments Today
The coronavirus pandemic has thrown the economy and the markets into a tailspin. The decade-long bull market collapsed and, despite a partial recovery, is still pretty grim. No one can say for certain when and if the pandemic will ease up, when there might be a vaccine, or if there will ever be an effective cure. With many fearing a ten year recession or worse we have arrived at a metaphorical equivalent to Baron Rothschild’s “blood in the streets” reason for the best time to invest. If this is the case and we are bottoming out, what are the best bargains today to ensure the vitality of your portfolio for years to come?
Best Bargain Investments Today
The ideal investment in times such as these is a stock that has virtually collapsed but a company with sound intrinsic stock value. In other words, we are looking for companies whose fortunes seem grime to most investors but which have a strong margin of safety and are likely to keep making money through this crisis and surge to huge profits in the future. What are some examples?
The Motley Fool suggests three possibilities of stocks to buy on sale. These are H&R Block, Capital One Financial, and United Airlines.
Hundreds of individual stocks are still marked down 30% (or more) off the prices they fetched at the beginning of this year. The “sale,” in fact, is far from over. And here are three top stocks you can still buy on sale today.
H&R Block is down about 30% this year and has a business that should not be adversely affected by the pandemic or recession over the long term. They seem to fit our formula for stocks that have been somewhat unfairly discounted in this market and which will likely survive and prosper.
Capital One Financial is down 40% for the year but some of the “bad news” has to do with their taking a $5 billion accounting write off for debts they believe will not be paid. This sort of solid preparation for the future is a good sign for things to come instead of a devastating blow. Their credit card operations are likely to do well in a world where social distancing will still be the norm for some time to come.
United Airlines has taken the biggest hit with a 75% loss in stock price this year. These folks may be the ones most strongly affected by how the pandemic changes the economy. With evidence now showing that the coronavirus hangs in the air for as long as 8 minutes in enclosed spaces, such as airplane cabins, restrictions on air travel and hesitancy of folks to fly will likely continue for some time. On the other hand, there will be a complete housecleaning of the airline industry as this crisis plays out. Someone will survive and betting a little of your portfolio on United may not be such a bad idea.
Kiplinger looks at energy stocks to “ride out the crisis” and for long term investment opportunities. As we noted last month, this may be a great opportunity to buy energy stocks for the long term. Most these are greatly depressed in price and the world will still need energy when the virus recedes. The key will be picking the survivors from currently depressed energy stocks.
Stochastic Trend
Stochastics has been a useful tool in predicting stock prices since it was developed by George Lane 75 years ago. This tool assesses how closing price and price range relate or a given time frame. Stock investors and traders can use a stochastic trend to determine if they should buy or sell their securities. This tool is always used in conjunction with methods like important moving averages in determining when is the best time to buy or sell.
What “Stochastic” Means
The dictionary definition of stochastic is something that has a pattern or distribution which is random, cannot be predicted exactly, but can be analyzed using statistics. In stock investing and trading, stochastics help make sense of what often appear to be random movements in individual equity and market prices. This is similar to so called chaos theory in which seemingly chaotic events can be, to a degree predicted and prepared for. In stock trading the stochastic approach is generally used to determine overbought and oversold situations in order to guide purchases and sales.
Stochastic Forecasting Models
All stochastic forecasting models look at data sequences as they unfold over time. Point is to draw useful conclusions from the process. In general, stochastic processes are considered stationary or non-stationary. The three types of models are auto-regressive processes, moving averages, and combinations of moving averages and auto-regressive processes. Auto-regressive simply means that post information is used to predict future events such as when a stock trend is going up and you predict that the trend will continue.
Stochastic Trading
The approach used most commonly in stochastic trading is called a stochastic oscillator. This tool indicates momentum by comparing trading ranges and closing prices within a defined timeframe. By using moving averages and adjusting time frames, it is possible to make this indicator more or less sensitive and more or less reliable. The goal is always to decide if an equity or market is overbought or oversold in order to make profitable decisions about when to buy or sell. There will always be a tradeoff between making the most timely (and most profitable) trade.
Stochastic Cross
A full stochastic oscillator uses two lines on a trading chart. One, called the %K line, notes the current price (typically a closing price). The other line, called the %D line, notes a calculation based on the moving average. The first is also called the fast line while the second is also called the slow line. What traders look out for is when line crosses over the other in a stochastic cross or crossover. When the fast or K line passes below the slow or D line it is considered a signal to sell the equity and when the fast or K line passes above the slow or D line, it is a signal to buy.
Nifty Stochastic Chart
The National Index Fifty is the weighted average of fifty stocks in the Indian national stock exchange. The Nifty stochastic chart is one of two primary stock indices used for the Indian exchange. This index is managed and owned by India Index Services and Products and is the largest Indian financial product. It includes both offshore and onshore exchange traded funds. It is the most actively traded contract in the world covering thirteen sectors. The most heavily weighted sectors are financials, energy, and consumer goods.
Ichimoku Stochastic Strategy
This is a scalping strategy used in trading Forex. It uses an Ichimoku medium setting and a dot MSS oscillator as its indicators. It was created for high-low binary options but also works in non-binary settings. Ichimoku refers to the Ichimoku cloud, a set of technical indicators designed to demonstrate levels of support and resistance. Use this method for intraday scalping with as many as ten charts open at the same time and set to five and ten minute intervals. The medium Ichimoku settings are eight, twenty-five, and forty-eight.
Backward Stochastic Differential Equation
Backward and forward equations generally refer to differential equations that predict probability density in a stochastic process. A backward stochastic differential equation is solved backward in time. Stochastic differential equations are those for which 1 or more of the terms involve a stochastic process. Thus, the solution is also a stochastic process. This approach is used to model stock prices as well as heat-related physical systems. The point is to make sense of and be able to predict future behavior of the system (stock prices) in a seemingly random environment.
What Shape Will the Economic Recovery Be?
After the collapse of stock prices ending the decade-long bull market, stocks have come back about half way. However, the economy is looking worse. We asked recently why is the stock market ignoring the economy. How investors position themselves these days will be based on the answer to this question. What shape will the economic recovery be? There are three possible answers to this multiple choice quiz.
- V-shaped recovery
- U-shaped recovery
- L-shaped recovery
The V shape is what happened a decade ago when the financial crisis came on quickly and began to recover quickly. This is what investors hope for as they can jump in at the bottom and expect to see handsome profits.
A U shape is what happened with the Great Depression when the economy collapsed and did not really recover for a decade. In this case, investors can pick up bargains but will need to wait a long time to see their investments pay off.
An L shape assumes that there will be no recovery to previous levels. This is what economists and many investors fear the most.
What Shape Will the Economic Recovery Be?
Forbes speculates on this subject in a recent article, What Is the Shape of Economic Recovery, V, U, or L? They note that each category may have some businesses even though the overall economy may fall into one of the three options. To know which will apply, they say that three questions need to be answered.
- Have customer habits changed permanently?
- Did power dynamics structure in the value chain get completely altered?
- Did regulatory stance change?
Answer these questions and you will know if you need to find safe investments for a ten year recession or if you should go “all in” in expectations of a miracle recovery later this year. Forbes points out Royal Caribbean as a company that may be hurt for the long term by this crisis and Warren Buffett obviously thinks the same about airlines as he recently dumped all of his airline holdings.
Investing in Stocks Based on Which Shape Their Recovery Will Be
Investing in stocks for the long term requires an accurate assessment of intrinsic stock value. Smart long term investors only invest in companies for which they understand how the company makes its money and are certain that their business plan will work into the long term future. Consumer product companies always hold up well in a recession because they sell things that people need during good times and bad. Today we can expect companies that deal online to do better than their competitors as the coronavirus forces us to socially isolate. How will these business models do if the recovery is an L shape and never really comes back to its former level?
For more thoughts on this subject, take a look at what Market Watch says in their article about an abnormal economic recovery. They note that V shape is what happens when consumer stocks and financials get better first. Now it is the tech stocks and pharmaceuticals which are benefiting due to their being well-positioned in a situation driven by the virus. They view this as an indication that the recovery will be slow as with a U shape of incomplete as with the L shape.
How Will the Pandemic Change the Economy?
After the collapse of the decade-long bull market, it has recovered about half of its losses. The recovery has been based on optimism. The Fed reduced interest rates and provided a unprecedented financial easing package. Congress passed their $2 trillion stimulus bill what hopefully has avoided some of the bank and corporate handouts that slipped into the one ten years ago. But, the avalanche of terrible earnings reports has only started to arrive. A shock to the market happened the other day when it was clear that Warren Buffett had dumped all of his airline stocks. Buffett’s said these businesses will be changed into the distant future. How will the pandemic change the economy in ways? Will it do so in ways that will destroy previously stable industries? This is a question for both short term traders and long term investors.
How Will the Pandemic Change the Economy?
Market Watch writes about a trap awaiting the stock market in the next months. Their thinking is “at all of the good news has been squeezed out of the tube of toothpaste!” These bits of good news include “unprecedented stimulus, an inevitable curve flattening in U.S. cases and deaths, reopening plans and optimism over remdesivir clinical trials.”
Summer could bring “hard economic data collapsing like we’ve never seen before, terrible corporate guidance, stories of pending bankruptcies,” and a second wave of layoffs that will hit the white-collar sector, warned McElligott. Rising trade-war rhetoric from the White House as a presidential election campaign heats up could present more risk, he added.
“That’s why I think folks are getting ready to hit the wall again, with this idea we’ve moved out of stabilization and now we’re back into the harsh reality of what this is,” without having a Federal Reserve boost and no more stimulus checks until things get a lot worse, he said.
These folks look to the fall as a time of market recovery but only after a fall in stock prices this summer. Their thinking is that as the pandemic persists, or even worsens, it will negatively affect stock prices..
Which Business Models Won’t Work Any More?
The pandemic will go on for at least two more years if there is no vaccine or medicine to will kill the virus. If it then mutates and comes back every year, the effects on society and the economy could become permanent. This would give us a world in which travel is curtailed. Cruise lines, airlines, travel agencies, and vacation spots will no longer have sufficient customers to stay in business in their current forms.
If social distancing becomes a way of life, restaurants, casinos, bars, and sporting events will all find it hard to remain profitable with smaller customer bases. When no one can travel by car, plane, train, or bus, the consumption of gasoline and will drop and keep the price of oil down into the distant future.
Online business will likely become increasingly dominant as will those that deliver or do “curbside” service.
Thinking about how the coronavirus will reshape the economy will help traders and investors make the most profitable decisions going forward.
Japanese Candlestick Trading Signals
An excellent technical analysis tool for trading stocks, options, futures, or Forex is the collection of Japanese Candlestick trading signals. Since the days of the Samurai, these signals have guided traders to reliable profits. Candlesticks are not only a reliable trading signal but also easy to read and use. There are a dozen major signals and many secondary signals that rice traders in Japan used centuries ago and these patterns work just as well today in the fast-moving stock market.
The Secret Code of Japanese Candlesticks
The fact is that Japanese Candlesticks are a mystery only to those who have not bothered to learn them. The way the system works is like this. A “candlestick” is a rectangle with lines extending from the top and/or from the bottom. These symbols represent the range of trading of a stock or other equity over a defined period such an hour, a day, a week, or a month. The candlestick is superimposed on a price chart to help interpretation of evolving price patterns. The candle represents the opening and closing prices for the equity. So, when these were close together, the candle is very short and when they were far apart, the candle is very long. The lines (like wicks of a candle and called shadows) represent the total range of trading. When the equity closes higher than its opening the candle is white and when it closes lower the candle is black.
How to Read Japanese Candlestick Charts
Once you know how to read a single candlestick, the next step to understanding Japanese Candlestick signals is to understand the implications of a single size and color of candlestick and what it means when two, three, or more are found in sequence. Experts at trading with candlesticks rely of clear signals and never “reach” to try to make a signal meet their expectations or wishes. When you trade this way, you will only make trades that have a high likelihood of success. A basic and extremely important signal is the Doji candlestick.
Doji Candlestick
When markets are undecided as to whether a trend is about to end and reverse, the opening and closing prices for a day will be very close together. This gives you a candlestick that looks like a burned out candle with very little height or even just a line. This may be accompanied by very long upper or lower shadows which indicates that the market tried to move up or down but came back to its beginning level at the end of the trading period. This signal, by itself, does not tell you where the market is going next. But it does tell you to expect a jump either up or down when the market makes up its mind.
Japanese Candlestick Reversal Patterns
What many traders find profitable are Japanese Candlestick reversal patterns. A good example is the bullish engulfing pattern which commonly occurs at the bottom of downward market trend. It signals that the bad news has been all squeezed out of the tube of toothpaste and the market is likely to start an upward rally. The signal includes three downward days, a day when an upward rally started and then fizzed out, and then a day that starts by gapping lower and then rallying to “engulf” the previous downward day.
Japanese Rice Traders Candlesticks
These signals worked for trading in the Japanese rice markets centuries ago and still work today. However, they are applicable to virtually any traded market. These are purely technical trading tools and do not rely on any fundamental analysis input to interpret them. However, most traders use candlesticks as part of their trading arsenal along with tools like the important moving averages. Even folks who are experts at candlestick trading will typically wait for a confirming day or two before jumping in completely on what may be an impressive bull market rally.
Trading Applications of Japanese Candlestick Charting
Candlesticks are technical analysis tools. They have been around for centuries and provide an accurate indication of market direction when there are clear signals. However, the majority of traders who use candlesticks do so because the signals are easy to read. They are used in conjunction with things like moving averages and a basic understanding of intrinsic stock value. Many times value investors will have their eye on a stock that has excellent long term potential but which has been somewhat unfairly driven down by a negative market. The use of Japanese Candlesticks is meant to signal when to pull the trigger at the most profitable time to start buying that equity.
History of Japanese Candlesticks
Back in the Samurai era in Japan there was a legendary rice trader, Munehisa Homma. He realized that emotions of other traders had a big effect on prices, often as much as the forces of supply and demand. He simply kept track of how certain price patterns were followed by predictable market movement. And, he used a simple design, which is the same rectangle and line configuration used today. His system came into general use and, when the Japanese stock market opened in the mid-1800s, it came into use there as well. It took more than a hundred years for the rest of the world to realize the value of this excellent trading tool and put it to use outside of Japan.
Japanese Candlestick Tutorial
You can learn this system on your own by reading and practicing or you can get help from an expert. The best Japanese Candlestick Tutorial material we have found comes from Stephen Bigalow at www.CandlestickForum.com. There are several membership options that allow you to take advantage of both Japanese Candlestick trading and Mr. Bigalow’s expertise. Mr. Bigalow published a book entitled Profitable Candlestick Trading which is an excellent base from which you can start your journey to profits with Candlestick signals. Check their store for more information.
Why Is the Stock Market Ignoring the Economy?
As noted in recent article in The Wall Street Journal, the stock market had its best two-week run since the 1930s while the economy is looking worse and worse. They say that the stock market is ignoring the economy. Why is the stock market ignoring the economy? Is it as the Journal suggests that investors are expecting a fast economic recovery or that they believe a miracle cure or vaccine will appear sooner than experts anticipate?
Why Is the Stock Market Ignoring the Economy?
First of all, the stock market always anticipates how it believes the economy and individual companies will be doing in the near and long-term future. Warren Buffett said that if you are not willing to own a stock for ten years you should not own it for a minute. This is the long term investing approach and it should be noted that the famed “Oracle of Omaha” has not spent any of his cash hoard so far during the market meltdown or partial recovery. Shorter term investors and traders are more focused on technical factors than fundamental analysis when investing in stocks.
The market appears to be going up because today’s investors are keying on what happened in the recovery from the 2007 to 2009 Financial Crisis instead of what happened in the Great Depression. While we have been thinking about the possibility of a ten year recession, many investors want to time the market and get it at what they believe was a short term bottom. But, there may be problems with this approach.
When Will the Profits Return?
Historically low interest rates and impressive profits, especially in the top tech stocks, are what drove the market higher and higher for a decade. We will certainly have low interest rates for a long time to come but, how soon will profits return and to what degree?
Investor’s Business Daily writes that the Coronavirus Recession May Ravage Corporate Earnings Longer than You Think.
The first earnings season of the coronavirus recession is coming up soon, and the estimates range from terrible to catastrophic. And the outlook for a recovery will depend more on infection curves and social-distancing policies than on traditional economic stimulus.
The signs point to an ugly earnings season. Since the beginning of March, more than 200 companies have withdrawn guidance, including Delta Air Lines (DAL), Twitter (TWTR), Hilton Holdings (HLT), General Motors (GM) and Target (TGT). Even Apple (AAPL) has warned it won’t hit targets.
This was written just a couple of weeks ago and is coming true as earnings reports both shock and dismay many investors. And projections range from bad to horrific.
Yardeni Research projects plunges of 23.4% in Q1, 51.6% in Q2, 28.8% in Q3 and 4.8% in Q4. For all of 2020, the firm expects S&P 500 earnings to decrease by 26.4%, before turning positive next year.
Investors, like Buffett, who have adopted a wait and see attitude risk losing out on some nice profits going forward but those who are ignoring the worst loss of jobs (and spending power) since the Great Depression are risking everything!
What Is the Meaning of Gap Analysis?
What is the meaning of gap analysis? Gap analysis can refer to the comparison of performance versus expectations in a business or in large jumps up or down in opening stock prices. Both are useful for investors.
What Is Gap Analysis in Finance?
When the management and board of directors of a company see a substantial gap between performance and expectations, changes need to be made in operations or in management. Competent gap analysis will commonly make clear which path to follow.
Value investors commonly look at intrinsic stock value. When there is a gap between company potential and current performance and when that difference is likely to be remedied with time, a value investor will buy with the expectation of long term profits.
Equity Gap Analysis
What is the meaning of gap analysis for you as a short term investor or trader? You will often seek to profit from daily jumps (up or down) in the price of a stock. A correct interpretation of just why a stock price jumped leads to profits while an incorrect interpretation can lead to dismal results.
Advantages of Gap Analysis
Gaps occur most often because of either technical factors or quick changes in fundamentals. To take advantage of gap analysis, you need to know your gaps.
Breakaway Gaps
These happen when a trend has run its course and the market will move in the opposite direction.
Exhaustion Gaps
This is what happens when a trend or price pattern has largely run its course and not everyone sees it. As such, there will be a last heroic shot at a market high or desperate drop to a low.
Continuation Gaps
These are also referred to as runaway gaps. They happen in an established trend and typically signal that more investors are getting bullish (or bearish).
Common Gaps
This is the catch-all term for when a gap occurs and the reason is not clear.
And, you need to learn how to predict whether a gap signals a movement onward or will “fill” or move back to the original point. We wrote recently about the Tesla short squeeze. This was an instance when the gap refilled as the effects of the short squeeze evaporated.
Gap Analysis Model
In order to deal effectively with gaps between performance and expectations, a company needs a process. Luckily, a gap analysis model does not need to be developed from scratch. Many are available as are experts in revitalizing businesses. Likewise, a trader or investor who wants to profit from gap analysis needs to follow a reliable model. These are also readily available. The key is to learn the model and how to use it!
Gap Analysis Methods
When investing in stocks, you can use both fundamental analysis and technical analysis methods in gap analysis. Although the eventual price of an equity is determined by fundamentals, the daily variations, including gaps, are caused by market sentiment which is amenable to analysis with technical tools.
Gap Analysis Chart Templates
The best way to learn and apply gap analysis is to use templates which demonstrate the various types of gaps and how the market will act after the gap happens. This example demonstrates a runaway gap.
Gap Analysis Protocol
Successful traders and investors pick and choose the equities and market sectors in which they trade or invest. The same will apply to gap analysis. Many times a value investor will be watching a stock in hopes of buying at an attractive price. He or she may even be able to predict when a gap will occur. The most successful already have a gap analysis protocol in place that allows them to carry out fast and effective analysis that results in profits.
Will There Be a Post-coronavirus Stock Market Rally?
Recessions are eventually followed by economic recoveries and stock market crashes are usually followed by rallies. The usual questions for the market are how soon, to what degree, and which stocks will lead the way. The coronavirus pandemic and the need for worldwide social distancing measures have driven the world into a recession that some fear will last ten years or more. The Dow Jones Industrial Average has lost all of the gains of the Trump era and US employment has lost all of the gains since the Financial Crisis. If you are investing in stocks during this moment of crisis, when should you buy stocks again? Depending on which stocks you buy and when, will the coming rally be a profitable monster or a sad fizzle?
Will There Be a Post-coronavirus Stock Market Rally?
Market Watch is in the camp that expects the biggest rally ever as the coronavirus subsides. Their arguments are generally persuasive, but investors always need to do their own analysis when investing in stocks. Here are their arguments.
- Interest rates will be low for years to come which will make stocks more attractive than bonds, CDs, or other interest rate-dependent investments.
- The Fed will increase its balance sheet up to the $6 to $8 Trillion dollar range and history tells us that much of this money ends up in the stock market which will fuel a huge rally.
- Consumer demand is getting bottled up because of social distancing and when things get better people will be eating out, traveling, and hitting the mall in huge numbers.
- The will be a huge short squeeze as traders betting against a recovery get burned. Like with the Tesla short squeeze that we wrote about recently, this will drive the market up.
- Globalization is going to take a big hit, especially with the “anywhere but China” movement. As supply chains get shifted there will be a huge amount of investment which will spur the economy and the market.
- The unprecedented amounts of stimulus monies being thrown at the coronavirus crisis will at least partly find their way into the stock market and drive up prices.
- Low interest rates will drive retirees away from bonds and into stocks to retain their earnings in later years.
Is This Good Investing Advice?
If you buy their arguments, you will want to invest in an index fund that tracks the S&P 500 because they do not have any advice about which investments will do the best during a comeback rally.
We are not convinced that so much money will make it into the stock market because much of the stimulus money is going to buy groceries, pay rent, and keep workers on payrolls.
If there is a short squeeze, it will be temporary. In fact, the Tesla short squeeze we wrote about was immediately followed by a sharp fall bringing the stock back to about where it was before the squeeze.
What Kind of World Will It Be Post-coronavirus?
One of my children recently mentioned how many of her friends were “starting to sound like Grandma” who lived through the Great Depression. (saving every penny and never leaving a room without turning off the lights). Our belief is that this experience, which is not anywhere near over, will shape beliefs and habits for a lifetime. People are more likely to put money in the bank or secure dividend stocks than take long vacations for some time to come. Any rally will be based on people putting their financial lives back together.
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