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About Jim Walker

Jim Walker has been a member since November 8th 2010, and has created 863 posts from scratch.

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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.

  1. Interest rates will be low for years to come which will make stocks more attractive than bonds, CDs, or other interest rate-dependent investments.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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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Will There Be a Post-coronavirus Stock Market Rally? – DOC

Quality Trend Analysis

Trend analysis is an effective way to predict equity price movements. But, it requires a good understanding of the market and its movements. And, for this tool to result in profits, it needs to be applied to quality investments trading on major exchanges and not cheap penny stocks that are prone to the “pump and dump” type of hype. We refer to this as quality trend analysis. Here is a snapshot of the various aspects of quality trend analysis that you can use for profitable investing and trading.

Purpose of Trend Analysis

The reason to use this approach in investment and trading is to predict future prices. The rationale is that by finding a beginning or continuing trend, an investor can buy and ride the trend to continuing profits. And, when the trend is about to reverse, this system helps one decide when to sell. The end game is always to gain profits and avoid losses, which is why quality trend analysis of strong companies that are actively traded in high volume is more reliable and profitable.

Use quality trend analysis for profits in equity trading.

Objectives of Trend Analysis

When you use trend analysis your focus will be short term, medium term, or long term. Or it can focus on all time horizons depending on if you are looking for short term profits or getting into a long term investment at the best possible price. You can apply trend analysis to both rising and falling market and to bull to bear reversals and bear to bull reversals. The objective is always to stay a step ahead of the market.

Weekly Trend Analysis

Traders who are looking for profitable swing trades will commonly employ weekly trend analysis. They are not applicable to day trading because they only summarize sequential weeks but are ideal for those looking to capitalize on trends that evolve over weeks and months. They are the most commonly used chart for trend analysis. These charts show a single point on a graph, bar, or candle for each week represented. By summarizing each week, these charts average out daily trading “static” like when you use important moving averages.

Seasonal Trend Analysis

Some stocks, like retailers, have seasonal peaks and troughs in their businesses. Seasonal trend analysis is designed to pick up on these trends and predict associated price movements. This approach typically works well for cyclical stocks whose cycles are at least partly driven by the calendar.

Ratio Trend Analysis

This technique fits well with trading based on analysis of intrinsic stock value. Ratio analysis looks at company liquidity, profitability, and efficiency of its operations. Ratio trend analysis follows these issues over time. Clearly, when a company’s financials are getting steadily better, or worse, it is an indication that the stock price will be heading up or down over time.

Wave Trend Analysis

This method goes back to the 1930s when Ralph Nelson Elliott discovered that “fractal waves” existed in the market and could be identified and used to predict price movement. He gained fame in 1935 when he predicted a market bottom that (for others) seemed to come out of nowhere. As with other methods, this tool can be used for up-trending and down-trending markets and well as for market reversals.

Trend Analysis Formula Example

A simple example of trend analysis is to look at company profits over several years. The process starts by picking a base year and then comparing all succeeding years to the base.
This can be done directly or as a ratio.

Amount of change = Current year amount – Base year amount

Percent change = (Current year amount – Base year amount) ÷ Base year amount

The key to any formula is that you need to be using meaningful numbers and only do quality trend analysis instead of working with inadequate or misleading data!

What Will the Recovery Be Like?

And How Should You Invest?

As the coronavirus pandemic seems to be leveling off there are hopes for better times ahead. What will the recovery be like and how should you invest? We have written about how to approach investing at this time of crisis starting with our wondering how far stocks will fall. Will there be a stock market rally and, if so, how soon will it happen and how strong will it be? The answers to these sorts of questions hinge on just what society and the economy will look like in the weeks, months, and years to come.

What Will the Recovery Look Like?

J.P. Morgan writes about recovery from the covid-19 recession.

The global recession induced by COVID-19 might only be a couple of months old, but direct central bank intervention and some encouraging signs of recovery from China have sparked the debate of a “V-shaped” versus a “U-shaped” recovery in economies and markets.

The “best case scenario” will be a “V-shaped” rapid and rapid recovery, which has been the most common case over the last half century. The Financial Crisis and Great Depression are the prime examples of prolonged, “U-shaped” recoveries. The economic conditions that end up with a quick recovery are those in which there are sufficient cash and credit available to ramp up production, put businesses back in operation and get consumers to start spending again.

The case for a fast recovery is that central banks and governments have been quick to helicopter in money directly to whole societies. The case against a quick recovery is that just how soon the virus will allow the economy to ramp up again is not clear. When the initial stimulus checks run out, will there be more? How successful will attempts to reopen businesses in the face of a potential second or third wave of covid-19 infection?

To the extent that states and the Federal government are willing to issue debt in order to do things like rebuild American infrastructure, such attempts to mobilize the economy like in WWII could have long term benefits as well bring the country out of a year or two-year long recession instead of letting it sink into a decade-long depression!

The bottom line from J.P. Morgan is that long-term damage is likely from this crisis and that investors should consider this when choosing investments.

We routinely look at what Warren Buffett and Berkshire Hathaway are doing as a guide for long term investing. It is of note that Buffett is yet to make any large purchases and is still stockpiling cash!

Investments for a Slow Recovery

Consumer goods are still necessary during a recession. Thus Walmart is doing well as Dollar General and Amazon.com. Kiplinger lists twenty stocks for a recession and the list is heavily tilted towards companies that provide the necessities of life and not the luxuries. We wrote years ago about investing in beer as example of things that people will buy during both good times and bad! Mexico may have to do without Corona beer for Cinco de Mayo due to brewery shutdowns, but over the longer term, production will ramp up again and this sort of product will continue to make money for investors.

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Important Moving Averages

A commonly used market indicator for both stock trading and investing is the moving average. Investors who keep an eye on the important moving averages will be able to buy and sell at the most advantageous times. The value of using moving averages is that they help you see trends and average out the sort of brief market fluctuations that commonly confuse the issue. These averages are calculated over a variety of time periods and using several different methods. Matching the average that you use to your type of investing or trading is important.

Important Moving Averages

(Courtesy of Wealthv.com)

Why Moving Averages Are Important

When you trade or invest in stocks, you need tools that help you stay in touch with price action. Even if you are investing in stocks for the long term, you would rather purchase at a low price instead of a high one. Why moving averages are important is because they smooth out the “static” of short term price movement.

Different Moving Averages

The most commonly employed are the fifty, one hundred, and two hundred day time periods for this approach. In general, the longer the time period the less the indicator will be affected by short term ups and downs. For many traders, the two day average is a benchmark for buying versus selling. Many only buy when prices are above that average and quickly sell when they are below.

The shorter time periods of five, ten, twenty, or even fifty days are useful in recognizing short term trends for swing trading. If your focus in on day trading, a ten day average that updates every hour is good.

Most Used Moving Averages

Which one of these time frames you employ will always depend on your investment and trading time horizons. Short time frames go with short term trading and longer periods go with timing long term investments. In addition, there are simple moving averages and more complex ones within each time frame. Your choice will often depend on whether you are using it as an indicator of the trend line or employing it as a baseline on top of which you use more sophisticated technical indicators.

A simple moving average is based on average prices while an exponential moving average gives more weight to recent price changes. You can set up yours based on opening or closing price, low price, high price, or a combination. Each approach has its advantages.

Moving Average Volatility

Traders use this tool to accurately predict market trends and reversals. While a simple average is easier to understand, it may be too slow in spotting price changes. The exponential average is often more accurate in predicting near-term changes. The same can be true of the double exponential moving average, aka DEMA. Volatility is smoothed out with longer time-frames but with a loss of short-term precision.

Moving Average Secrets

A way that many traders and investors get around the lack of precision with longer time-frames is to use the DEMA using this formula:

DEMA = 2*EMA – EMA(EMA)

When you use this approach with a hundred day or two hundred day average, you get the longer term average that smooths out daily price fluctuations as well as the more sensitive indicator for market changes. In addition, savvy traders often use both a shorter term average as well as a longer term one for a broader view of the market.

Moving Average Stock Strategy

While this approach is very valuable, it has its flaws as well. It is a backward-looking indicator that only sees the time-frame for which it is calculated. Thus it does not “know” about market cycles or fundamental analysis indicators such as new products or competitors in a market sector. The best moving average stock strategy is to combine this analysis tool with other methods.

Mastering Moving Averages

As with all trading and investing tools, practice makes perfect. We often advise being stock traders to use simulation trading until they get the hang of the various indicators and tools available. The same applies to mastering moving averages. Add the most important moving averages for more successful trades and investments!

If you prefer, here is the video version:

Is This a Golden Opportunity to Invest in Energy Stocks?

The coronavirus pandemic has ushered in the worst financial crisis since the Great Depression. Add to that the oil production war started by the Saudis and you have the lowest oil and gas prices in almost 20 years! It might seem like a good idea to get out of any investments related to oil and gas production. But, this terrible crisis, like every crisis, will pass. When that happens there will be a rebound. How fast or slowly that happens will depend on how quickly the virus threat recedes and how well the Fed and congress do in supporting credit markets and providing cash to work with. The question that we would like to pose is this. Is this a golden opportunity to invest in energy stocks?

Is This a Golden Opportunity to Invest in Energy Stocks?

Folks who have been thinking along the same lines include Seeking Alpha. In a current article they suggest that you invest in oil now.

COVID-19 seems to see the curve flattening. This is the largest source of the demand drop, so any recovery here would be significant.

We’re forecasting a recovery in oil prices now moving towards the first half of 2021 rather than the latter half of 2021.

In the short term, states may start to loosen restrictions on movement in a month or two, which would increase the demand for oil. This would start the recovery process for oil stocks. And, US oil producers are discussing cutbacks in production in the Gulf of Mexico and the Permian Basin (Texas). OPEC+ has agreed to cutbacks across the board.

However, for many of the oil producers the price of oil is now well below their breakeven point. Many, like Russia and Saudi Arabia, need the cash flow from oil and natural gas production to keep their economies going and to avoid social unrest. Thus, there may be a lot more pain in the oil sector in the coming months up to a year or so.

How Will the Recovery Look for Energy Companies?

The first thing to consider when investing in energy stocks is which of them will be solvent when the coronavirus crisis is over! Those with deep pockets may indeed benefit by purchasing their weaken competitors. We have mentioned in other articles that there is a good chance that the government will finally invest in long term infrastructure projects. If and when this happens it could give the US economy the sort of boost that war production did during WWII. That would increase the demand for oil, the price of oil, and prices of energy stocks. The Motley Fool suggests Exxon and Chevron as good bets for the long term and oil stocks to invest in right now. They have lots of cash and are still drilling with an eye on the future. To the extent that smaller companies have the cash or credit to survive into 2021, they may also be good investments. As always, look at intrinsic stock value when investing in stocks.

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IsThis a Golden Opportunity to Invest in Energy Stocks? – DOC


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