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Stock Market Recovery Risks

The US stock market has miraculously regained all of its losses for the year despite a recession. What are the stock market recovery risks? There are three things that need to happen for the market recovery to hold. The first is that central banks including the US Federal Reserve need to continue their level of “doing anything necessary.” Second, there needs to be no second wave of covid-19. And, third of all, the shape of the economic recovery needs to be a “V.”

Stock Market Recovery Risks

CNN writes about these issues and says that for the current stock market rally to make sense, all three things we just mentioned need to work out favorably.

The stock market is notoriously forward-looking, and many believe this will be the shortest recession on record given that activity is already picking back up. But plenty of market watchers are still concerned that the recent euphoria has been overblown, pushing valuations too high. After all, the outlook is very different now than it was in January.

How likely is it that all three positive factors will fall into place to reduce any stock market recovery risks?

Will Central Banks Continue Their Support?

The International Monetary Fund writes about central bank support in this downloadable pdf.

Financial stability requires maintaining an adequate supply of credit to households and firms, countering both a sharp tightening in liquidity and the risks of fire-sales, and supporting the functioning of the payments system. These features are integral to monetary transmission and, therefore price stability. In light of these overall objectives, this note considers the following key questions regarding intervention strategy:
Which markets are critical for maintaining financial stability?
How can market dysfunction be identified and what are the appropriate triggers for intervention?
How should programs be designed to address market impairment?

The short version is that the IMF and other central banks and most importantly the US Federal Reserve are all ready and willing to do what it takes to help bring the economies of the world out of the covid-19 recession.

Will We Avoid a “Second Wave” of the Corona Virus?

The concern about a second wave of covid-19 is based on a couple of things. One is that both the Spanish Influenza in 1918 and the 2009-2010 influenza epidemics had particularly bad second waves. The other is that the pandemic was slowed to varying degrees in countries across the globe by strict social distancing measures. There are no effective medicines for this disease and no vaccine is likely to be available until at least next year, if then.  As restrictions are eased there is a risk of more infections.

Unlike the central bank issue, this is not about willingness of institutions to act but about the biology of a new virus and its effects on humans. That is a substantially murkier issue! We do know that whenever large crowds get together without appropriate social distancing the disease spreads. We also know that the vast majority of humans are “up to speed” on what needs to be done to protect themselves and their families. As such, it is quite possible that any second wave would be less devastating because of practices already in place.

The bottom line is probably going to be how many more new cases societies are willing to suffer in order to bring businesses back into operation and increase opportunities for social interaction.
The odds are that we will not see as bad a resurgence as the original surge of the disease but any belief that this disease will miraculously get better is pure fantasy. This is a risk to any quick economic recovery and to the resurgence of the stock market.

Will the Recession Be Brief with a V-shaped Recovery?

We wrote about the possible shape of the economic recovery. There is no way that some industries like aviation and aircraft manufacturing will make a V-shaped comeback. The same is true of tourism in general and cruises in particular are likely to suffer for quite some time. On the other hand, there are covid-19 era investment opportunities in big tech and especially in internet-related businesses.

Our take on the situation is that the economy is more likely to see a U-shaped recovery with some sectors in the L-shaped category. Meanwhile, there are businesses that have already snapped back in the V-shaped mode.
The stock market always looks to the future and appears to be discounting the risks of a long term recession and a second wave of covid-19. Not everyone is on board with this approach including the folks at Berkshire Hathaway who are sitting on a hoard of cash and waiting for the right moment to start buying, which they do not think has arrived.

Stock Market Recovery Risks – PDF

Stock Market Recovery Risks – DOC

Stock Market Recovery Risks – Slideshare


Covid-19 Era Investment Opportunities

The pandemic has driven business and social communications onto the internet. This movement was already well underway but has been hastened by the need for social distancing. Companies that work in this sector have benefited from the current crisis while face to face companies like restaurants, entertainment, and travel have suffered. Although grocery stores and pharmacies have stayed open, home delivery has boomed. The pandemic is not going to suddenly stop and many of the new ways of doing things are efficient. Thus we do not expect a return to “normal” when the virus lets up. Rather we expect to see a new normal and there is where we will find many covid-19 era investment opportunities.

Covid-19 Era Investment Opportunities

Russell Investments looked at evaluating growth and value stocks in the era of covid-19. Before making any specific suggestions, they offer some useful insights.

At its core, value investing anchors around exploiting short-term human behavior. Essentially, investors place too much of a focus on short-term outlooks.
Like growth investors, though, value investors also need to take a multi-year approach, as they don’t necessarily know which sectors, industries or parts of the market might fall out of favor. Generally speaking, you need to be willing to cast a pretty wide net, often over a number of years. Patience is required to exploit time-horizon biases.

The “take home lesson” from this is that you should diversify your investment portfolio if you want to benefit from buying cheap growth stocks today with the hope of seeing excellent long term profits.
If you are looking deals, you are more likely to find them in the value stock category right now as the spread between P/E values of growth and value stocks has widened significantly, as it did during the dot com bubble.

Covid-19 era investment opportunities- growth versus value

J.P. Morgan

A specific comment that they make is that the covid-19 crisis will accelerate changes in the tech sector and our ever-increasing reliance on tech and the internet, as we noted in our previous articles about the risks of covid-19 era investing.

They go on to note the following.

There’s been an enormous amount of consolidation in the stock market among companies within industries over the last 30 years or so, particularly over the last 20 years. Essentially, companies have been buying each other. The net effect of this is that the top four companies in most global industries now have, on average, 30% of the total industry revenue compared to roughly 20% in the past,” he explained. Ultimately, this concentration has led to rising returns and an increase in profitability for companies.

Examples include MasterCard, Google, and Facebook which routinely add users at virtually no incremental cost. These folks are so strongly positioned that it is hard for anyone to compete with them.
Virtually all large tech companies have the resources to add new products and services and will continue to benefit as the world moves increasingly to tech in all aspects of our lives.

Now Is (Always) the Time to Invest in Value Stocks

They make an excellent point that many investors wait until the future seems more secure to resume putting money into stocks. But, the best values are to be found when things look the worst. The best value occur when most folks are afraid to invest which is similar to the Buffett saying that you should be greedy when others are fearful.

The “take home lesson” seems to be that by using intrinsic stock value as a guide and by hedging your bets with portfolio diversification, the covid-19 era presents many investing opportunities for those willing to do a bit of homework and exercise a bit of patience.

Covid-19 Era Investment Opportunities – Slideshare

Covid-19 Era Investment Opportunities – DOC

Covid-19 Era Investment Opportunities – PDF


What Does FAANG Mean?

FAANG is an acronym. It refers to five tech stocks that have led the stock market for years due to their strong profits. The companies are Facebook, Amazon, Apple, Netflix, and Alphabet, which was previously known as Google. These companies had a total market capitalization of more than $4 trillion before the corona virus pandemic hit in January of 2020. Their combined capitalization as of June 2020 is $3.2 trillion which is 14% of the S&P 500.

What Is a FAANG Company?

For many, FAANG is synonymous with Big Tech, although Microsoft, Cisco, Oracle, IBM, Intel, and Samsung are not included in the group. Aside from being good investment opportunities and huge companies, the FAANG have been largely responsible for driving a social media and consumer revolution. Although IBM, Cisco, Intel, Oracle, and Microsoft provide the bricks and mortar for the technological revolution we are undergoing, they are not the driving forces like the FAANG group. Many of them are, however, equally good investment opportunities as are many of the smaller tech companies that dominate their niches.

Why Is Microsoft Not in FAANG?

First of all, there is no certification requirement for being in the FAANG group. The term FANG was coined by Jim Cramer, the popular investing show host with CNBC. Apple was added in 2017 to make the acronym FAANG. Cramer picked the original four as they were totally dominant in their areas. And, although Microsoft has a larger market capitalization than any except Apple (although that varies), it is in many ways a supporter of the recent social media and technological revolution rather than an instigator or leader.

FAANG Bear Market

In late 2018, all five FAANG stocks fell into a bear market. This resulted in an overall loss of $1 trillion before they rebounded to go even higher. This was repeated with an even greater loss at the onset of the Covid-19 pandemic but, again, the stocks have recovered and, in fact, led the market in the first stages of a market recovery. The general consensus is that the social distancing forced upon us by the virus has in many ways benefited these companies. Amazon has thrived as brick and mortar stores were forced to close, Netflix has benefited from folks looking for entertainment during a difficult time, and Google, Apple, and Facebook have benefited from both work and socializing moving almost entirely onto the internet. It would appear going for forward that any FAANG bear market is likely to be short lived.

What Does FAANG Mean results through June 2020
FAANG Stocks Up to 2020 (Motley Fool)

FAANG Bubble

As the stock market rally continued into the new decade, the recurring predictions of a FAANG bubble bursting continued as well. The fundamentalists in stock investing look at high P/E ratios and predict doom and gloom. The technicians see every tweak of the market as a forewarning of a collapse of these stocks. Nobody expects the companies to go away but many are concerned that their stock prices will not hold up over the long term. To a degree, investors choose these stocks because there are currently no better options. And, because everyone is jumping on the bandwagon, it keeps moving forward. But, so long as these folks keep making money, it is likely that any bubble, such as it is, will not burst any time soon.

FAANG S&P 500

Over the last decade more and more investors have chosen a passive approach. They pick an index fund that tracks the S&P 500 and put their money in using dollar cost averaging. Because the FAANG stocks are such a large part of the S&P 500 they tend to be seen as bellwethers for the market as a whole. Because these stocks are the natural leaders and will continue to be for the foreseeable future, a reasonable question ask is why not simply invest a little in each of these companies and forego the rest of the S&P 500. The rationale for staying with the S&P 500 is that it is a way to diversify your investment portfolio without picking and choosing individual stocks.

What does FAANG mean s&p 500 2020 ytd
S&P 500 2020 to June from Google Finance

FAANG Index Chart

If you are just interested in investing in FANG or FAANG stocks, there is no index fund that contains just these stocks. The closest is the AdvisorShares New Tech and Media ETF but it is actively managed and, although it is top heavy with FAANG, it contains 25 equities. If you look at a FAANG index chart, it is a nice measure of how these stocks are doing as a group but since there is no ETF that tracks just these stocks, such an index chart is of academic interest only. Your better choice is to track the S&P 500 and put your investments there.

FAANG Index Vanguard

Vanguard has several index funds that track tech stocks including the FAANG group. They do not, however, have an index fund that tracks only FAANG nor does anyone else. Part of this is because a fund with only five stocks in barely an index fund but rather a collection of a few stocks. As we noted previously, with this narrow of an approach one would do as well investing equally in each of the member stocks of the FAANG group. It would be easy to use a dollar cost averaging approach so that investments would adjust for the current price of any of the stocks.

Slideshare Version

What Does FAANG Mean? – DOC

What Does FAANG Mean? – PDF


Covid-19 Era Investment Risks

There are several issues that investors need to look at when picking investments as we, hopefully, come out of the covid-19 medical and economic crisis. Here are our thoughts on the subject.

Which Growth Stocks Will Grow in the Covid-19 Era?

If you have stayed in the tech stocks like Apple and Microsoft, you have companies with large cash reserves and which are positioned to take advantage of a continued switch to online work and increasing reliance on the internet. And, if you have stuck with basic consumer goods stocks, people will keep buying soap, cleaners, basic foods, and beer but these later stocks are somewhat defensive as they will not double or triple in value but rather protect your wealth during tough times. We looked briefly at pharmaceutical stocks as the covid-19 crisis hit and noted that it will take time for a vaccine or medications and that folks who make masks (like 3M) and sanitizers are better in the short term. Covid-19 era investment risks include expecting growth stocks in areas like hospitality or transportation to come back in the near term as the world will probably be different for quite some time.

How Soon Do You Need Your Investment Capital?

The current economic crisis will not really get better until we get an effective vaccine to inoculate the entire world or an effective and cheap medicine to treat everyone. The earliest any of this will happen is perhaps a year from now and that is not guaranteed. If you are jumping into the market today looking to lock in bargains, you need to make sure that you can let your money sit until things get better. For a prolonged recession that could be years. If you need to have your funds available sooner, you need to consider how to invest without losing any money in the short term. Interest rates are low but if you stay short term with bonds and CDs, your money will not be lost and will be available when you need it.

Beware of Cheap Investments in the Covid-19 Era

The St. Louis Dispatch has a useful article in this regard, Why Penny Stocks Aren’t the Answer to Investing During a Recession.

Penny stocks tend to trade at low valuations because the underlying businesses aren’t in good shape or there’s little visibility into their operations and outlook. It is possible to find companies in the penny-stock category that go on to post strong business performance and great stock returns, but the odds are stacked against you.

Buying penny stocks tends to have more in common with gambling than with principled, well-reasoned investing. Companies in the category often have weak balance sheets, generate little in the way of revenue or earnings, and are typically speculatively valued. These types of companies are especially prone to folding amid the heightened operating pressures created in a recession.

They go on to note that these factors are more important during a recession when it is the weak company who stock goes down while those with strong balance sheets and continued sales do not suffer as much.

The point in all of this is to be careful as you invest your wealth in preparation for a strong economic recovery. New week we will look at covid-19 era investment opportunities.

Covid-19 Era Investment Risks – PPT

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.

oes Socially Responsible Investing Make Financial Sense
Socially Responsible Investing

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.

Solar Energy: Does Socially Responsible Investing Make Financial Sense
Solar Farm

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.

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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.

Calls Among All Option Trading Strategies

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.

All Option Trading Strategies with Low Volume

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.

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All Option Trading Strategies – DOC

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.

Slideshare Version

Best Bargain Investments Today DOC

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.

An Ichimoku stochastic trend can be very effective in scalping Forex trades.
Ichimoku Stochastic Trend

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.

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Stochastic Trend – DOC

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.

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What Shape Will the Economic Recovery Be – DOC

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.

How Will the Pandemic Change the Economy? – PPT

How Will the Pandemic Change the Economy? – DOC


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