During the analysis period(Sep - Dec 2018, 4months), U.S. market has dropped for about 20% from their recent highest record(Nasdaq: 22.2%, Dows: 16.7%, S&P: 17.8%). Nasdaq has suffered most due to its high PE valuation since 2017. Between 2017 - early 2018, Tech. stocks were regarded as the most potential stocks due to their high profitability resulting in high-profit growth. However, high-profit growth will never last forever. Every single company will always reach its maximum profit level and then investors will not regard the stock as a growth stock and hence the high PE valuation will disappear. Stocks with over 100 PE ratio will always drop more than 50%
(eg. 2018.HK, 2382.HK, 1093.HK, 1548.HK).
In addition to profit re-valuation (adjustment/decrease of PE ratio), the political factor is probably the most influential element to affect the stock market. The following shows a list of possible factors/news affecting the market:
1. US-China Trade War
2. Expectation of deterioration of the US economy (inverted yield curve)
3. New model of Apple's Iphone( IPhone XR, XS) recorded weak sales
4. Plan of some European countries(such as Italy) to impose taxes on tech. company Google
5. Facebook leaked users' info.
6. Fed.'s announcement of an increase of interest rate
7. Non-cooperation and conflict of US. government (Views on interest rate between Fed. and Trump, views on building walls at the border in the US. between Trump and Council members.
8. US. Government's legal action against large Chinese companies(Huawei, ZTE) and people (Meng MengZou, CFO of Huawei), which indicated the bad relationship between the US. and China.
9. Conflict between European Union and Italy towards Italy's budget
Actually, the US-China Trade War has already begun since about mid 2017 to early 2018. At that time, the investors did not put very huge emphasis on it and thought that both countries would be settled very soon, so the market was keep going up. However, with more news came out, investors realised that the event might not be as easy as they thought before. With factors 2, 3, 6, investors tried to liquidate his position as soon as possible, resulting in the fall of the stock market.
Given the background stated above, now the questions are:
1. Whether the market will keep dropping in 2019?
If the answer is yes, which stocks we should buy?
If no, when the stock will reach bottom AND which strategies we should adopt at this moment?
WHICH STOCKS WE SHOULD BUY?
1. APPL (suffer from weak sales and a tool for the Chinese government to revenge the US. government)
2. GOOG (suffer from a tax target of Italy and maybe other European countries)
3. BRK.B (suffer from being a substantial shareholder of APPL)
4. MSFT
5.
ADBE??
6. INTEL (2nd tier choice)
7.
NTFX?
8.
TSLA?
9. V
10. NDAQ
11. BAC
12. JPM
13. GS
Except for BRK.B, the stock list only includes tech. stock, which is highly vulnerable and not diversified enough. Hence, research is needed to find out more US. stocks from different industries.
WHEN THE STOCK MARKET HIT BOTTOM?
Obviously, no one can answer this question. However, it also does not mean that we need to do a wild guess. Instead, we can try predicting it using the past data:
In Sep1987 market crash: S&P 500 dropped about 35% in 1 month.
In Oct 2000 market crash(pop of IT stocks and 911 event): S&P 500 dropped about 51% (Nas: 80%!!, Dows: 36.5% only) in 2.5 years
In Oct 2007 market crash: S&P 500 dropped about 57.7% in 1.5 years (similar to Nasdaq and Dows)
In other relatively "mild" market crushes, the stock market usually dropped about 12-20%.
****At this moment: In Oct 2018 market crash: S&P 500 dropped about 17.8% in 3 months (Nasdaq: 22.2%, Dows: 16.7%,)
(Of course not yet confirmed!)
*Update: Dow - 19.4% ; Nasdaq: 23.9% ; S&P500: 20.2%, confirmed)
Based on the market performance, it could have already been able to be regarded as a mild market crash. Between Jan 2016 - Oct2018, Dows, S&P500 and Nasdaq has surged for about 48%, 41.5% 60% respectively, which means during the market crash, Dows and S&P 500 should have a similar level of fall while Nasdaq would drop further. In a market crash, the average drop will be about 45% (57.7 + 35)/2 and the duration will be 2 years (2.5 +1.5) /2.
Therefore, if we expect a 45% drop, the index will be:
Dows: 27000*0.55 = 14850 ; S&P 500: 2900*0.55 = 1595; Nasdaq: 8000*0.55 =4400
If 35%:
Dows: 27000*0.65 = 17550 ; S&P 500: 2900*0.65 = 1885; Nasdaq: 8000*0.65 =5200
If 25%
Dows: 27000*0.75 = 20250 ; S&P 500: 2900*0.75 = 2175; Nasdaq: 8000*0.75 =6000
If 20%
Dows: 27000*0.8 = 21600 ; S&P 500: 2900*0.8 = 2320; Nasdaq: 8000*0.8 =6400
On 22 Dec 2018, the index is:
Dows: 22445; S&P500: 2416; Nasdaq: 6332
which strategies we should adopt at this moment
GIven the previous level of the bull market(mild in my opinion), I will not think the market will drop more than 35% (ps. Except for any other unforeseeable factors that adversely affect the stock market.)
I think the following strategies could be adopted:
If drop 20-25%, invest 25-30% of your available money. (25-30% for stocks in Nasdaq)
If drop 30-35% invest 25-30% of your available money. (35-40% for stocks in Nasdaq)
if drop 40-45% invest all remaining money (45-50% for stocks in Nasdaq)
Investment Period: the following 1.5 years after Oct 2018(Oct2018 - Apr 2020)
The above is for the US. stock market only. Let's see if we should adopt the same strategies for the Hong Kong stock market.
I should invest about 400-500K in the US. stock market, so the money allocation will be as follows.
if drop 20-25%: invest 25% money (450000 * 0.25 = 112,500 HKD)
if drop 30-35%: invest 30% money (450000 * 0.3 = 135,000 HKD)
if drop 40-45%: invest 45% money (450000 * 0.45 = 202,500 HKD)
Technical analysis using RSI
back to buying position increased 5%
on 31 May 2019, RSI of Dows dropped to 29.8 2 6
on 21 Dec 2018, RSI of Dows dropped to 24.6 2 20
on 11 Oct 2018, RSI of Dows dropped to 26.5 1 185
on 20 Jan 2016, RSI of Dows dropped to 28 2 11
on 25 Aug 2015, RSI of Dows dropped to 15.4 1 2
on 24Aug 2015, RSI of Dows dropped to 16.8 2 25
on 21 Aug 2015, RSI od DOws dropped to 22.2 44 60
on 16 Dec 2014, RSI of Dows dropped to 29.9 1 5
on 3 Feb 2014, RSI of Dows dropped to 27.1 3 11
on 21 Aug 2013, RSI of Dows dropped to 25.6 2 27
on 14 Nov 2012, RSI of Dows dropped to 25.9 3 27
on 1 Jun 2012, RSI of Dows dropped to 26.9 3 9
on 8 Aug 2011, RSI of Dows dropped to 18.5 1 20
on 10 Aug 2011, RSI of Dows dropped to 26.6
on 2 Mar 2009, RSI of Dows dropped to 25.8; 8 8
on 9 Oct 2008, RSI of Dows dropped to 23.9 2 3
on 26 Jun 2008, RSI of Dows dropped to 24.1 12 2.5 years
on 22 Jan 2008, RSI of Dows dropped to 27.0 1 2
