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Stock Market Thoughts (August 19, 2015)

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As I’m writing this, oil and energy stocks are being taken to the woodshed… again. It’s been another BRUTAL day, and who would have thought a few months ago than an investor could pick up shares of a high quality company such as ConocoPhillips (COP) for sub $48/share and a dividend yield of 6.2%?

What can I say? It’s getting ugly out there! Over the last 6-7 years, investors have been heavily spoiled by this bull run, witnessing stocks only moving in one direction (UP, UP, and UP!). As they so often say, “a rising tide lifts all boats“. Quite frankly, it hasn’t taken any degree of skill to succeed with stock market investing since an investor could have basically thrown darts blindly at just about any company out there and realized significant paper gains in a relatively short period of time over these last few glorious years…

The Market

At this point of the market cycle, it looks like the good days are finally coming to an end. Commodities (such as oil, copper, gold, silver, etc.) have been crashing, despite the fact that the major indices (such as the S&P 500) are still perched comfortably at the top of the totem pole.

There’s a huge disconnect and growing bifurcation in the marketplace today. You’ve got so many companies setting new 52 week lows, seemingly everyday — Walmart (WMT), Dover (DOV), Norfolk Southern (NSC), Emerson Electric (EMR), SolarCity (SCTY), BHP Billiton (BBL), COP, etc.

Oil, energy, transports, industrials, retail… you know, the building blocks of any growing or “recovering” economy!

While, on the other hand, you’ve got an equally good number of companies setting record highs — Home Depot (HD), Target (TGT), Visa (V), Netflix (NFLX), etc.

WMT is down in the dumps while TGT is shining bright… Very interesting! I also see other retailers such as Macy’s (M), JC Penney (JCP), and Sear’s (SHLD) still holding strong. If WMT is an indicator of what’s to come for retail, perhaps M, JCP, and SHLD would make for some tempting short candidates in the future (just a thought not a suggestion)!

But strangely enough, even the notorious bubble stocks such as Twitter (TWTR) and Yelp (YELP) have been taking a beating as of late… and are now at 52 week lows.

But the reality is this — until the “tech titans” of the industry take a major fall, most retail investors won’t care, and the media will continue on with their narrative of how we are in a thriving economic recovery and how everything in the world is just splendid! 🙂

So, right now, I’m watching the following companies very closely — Apple (AAPL), Google (GOOG), Amazon (AMZN), Facebook (FB), and NFLX.

If (when) those dominoes fall, the end of Happy Days will become official.

Dr. Copper

While the Fed is trying to distract us with concerns about a possible upcoming immaterial 25 basis point rate hike (and they can’t be serious about raising rates in this kind of environment), the real carnage is already taking place and wreaking havoc on investors’ portfolios TODAY.

They say that if you want a real indicator on the health of the economy, turn no further than to Dr. Copper:

spot-copper-5y-Large

Dr. Copper may not always be correct, but worldwide consumption of raw goods and materials is obviously slowing down, regardless of whether or not China continues to publish reports of sustainable 7% Y/Y GDP growth.

I don’t think any of us believe those claims to be true…

Market Cap to GDP

Not a fan of Dr. Copper? How about we use the Warren Buffett indicator? And who doesn’t love Mr. Buffett?

From Advisor Perspectives:

Buffett-Indicator

From Guru Focus:

Screen Shot 2015-08-19 at 11.18.34 AM

In any case, as an investor, it really doesn’t matter if you are a bull or bear; the idea is to make money! There’s really no reason not to play both sides of the coin.

And right now, many indicators have turned bearish and we may very well be entering into the first stages of a new bear market!

Dividend Growth Investor has a great new article on his own thoughts about bear markets.

Market Timing

I think we all know that it is damn near impossible to accurately try and time the market! I’m no expert market timer myself, but I’m trying to be a trends-follower. In other words, I don’t need to catch any EXACT market tops or bottoms to be successful, but I need to be moving along in the right direction…

Right now, I’m sitting mostly in cash.

And although it is very tempting for me to go on a buying spree, I remain convinced that the worst is still to come.

Thoughts

It would be nice to pick up shares of COP yielding at 6.2%, of course, but the same could have been said over the last few months when shares first eclipsed 5.0% yield…

Dollar-cost-averaging (DCA) is a great thing, but I prefer to execute that strategy in a rising bull market. On the way down, that strategy can be akin to “catching a falling knife”. And it’s safe to say that many investors have already been burned trying to get in too early… Many investors were loading up on Chevron (CVX) when it first hit $90/share… Right now, we are just on the verge of breaking through $80/share… and falling further by the day!

Quite frankly, no one knows how much further we have to go on the way down, so I’m going to do the easiest thing that I can do — NOTHING.

Again, you don’t need to catch the exact top or bottom to do well… Patience is a virtue and one skill that I’m trying to exercise at this time. The best returns are usually extracted from the market when other investors don’t want to touch a particular investment with a 100 ft. pole… With oil and energy stocks, there’s just far too many people rushing in right now for me to believe that the bottom is in

Then again, my philosophy on investing has changed over the years because I’m now operating from a different perspective than before — My primarily focus at this time is on wealth preservation, not continued growth.

This means that I can afford to be EXTREMELY patient with the market. For instance, if oil and energy stocks decide to change course and shoot up to the moon again, I will be perfectly content with missing out on this opportunity.

I’ll simply wait for the next train to arrive at the station… It always does.

However, if you are an investor at a different stage of the early FI game, then your gameplan may deviate greatly from my own. You may elect to be more aggressive when good deals come around; that’s completely understandable.

For myself, quite honestly, I’m not hunting for “good” deals anymore. I want “amazing” deals!

But speaking of trains arriving, the sector that I continue to be most interested in right now remains to be gold and silver mining stocks. The decline in the miners has been far more devastating than anything that is going on with oil and energy and I believe that final capitulation is just around the corner. In this particular sector, no one is blogging about it and retail investors have ZERO interest in these stocks.

Even at all-time lows, mainstream outlets are still speculating on further declines in gold and silver mining stocks. Seriously? When a stock has already fallen 90% in 5 years, you are still issuing a “Strong Sell” signal? Wow!

News flash — Oil is a commodity and civilization needs to consume it to thrive. Silver is ALSO a commodity (as well as money) and industry needs to consume it to produce ever-sophisticated new electronic gadgets.

Oil is universally loved by investors. Silver (and gold) are unequivocally hated!

That’s usually a good indicator that the bottom is in… or we are close to one. While the majority of investors will continue to chase oil and energy stocks (for good reason), I will continue to load up on the miners, instead.

Oil is in Year 1 of its downturn; gold and silver are in Year 4.

Perhaps this time next year, I will tune in to oil and energy stocks with much greater interest?

 

We’ll see…

 

Happy Investing!

{ 13 comments… add one }
  • ElleNo Gravatar August 19, 2015, 10:32 am

    As someone just getting into investing, I find this pretty frightening.

    I know people say not to try to time the markets, but right now, I feel like the best thing to do is wait until I find a good deal.

    I would feel like an idiot buying at the top of a bull market.

    Looking forward to see the sign that’s it’s time to buy, buy, buy!

    • FI FighterNo Gravatar August 19, 2015, 10:43 am

      Elle,

      Yeah, it’s getting pretty scary out there… I don’t believe that there is any right or wrong answer, you just have to do what you are comfortable with and what you feel is best for your own situation.

      If I may share my own story:

      When I first started working in 2008, I invested in index funds only. This was prior to the financial crisis in September. All through the crisis, I just kept on buying index funds…

      While my co-workers were kicking and screaming, I was asking myself, “What’s the big deal?”

      What I learned was this — everyone’s situation is unique and different. My co-workers had every right to be terrified… I was a newbie just starting out with almost nothing to lose… Yes, it’s no fun seeing a $10,000 portfolio being cut in half… but can you imagine what it might feel like for someone who has to see a $1,000,000 get reduced to $500,000?

      Night and day difference. For myself now, I can’t stomach a decline like that, so I’m ever cautious these days. Back then, it was no big deal…

      Adjust accordingly.

      Best wishes!

    • MartinNo Gravatar August 19, 2015, 12:24 pm

      Elle, this is the hardest part of investing. But look at it or force yourself (brutally) into an attitude or thinking about your goals and time horizon. For how long are you going to invest? Next 20 years? Then take this as a great opportunity. If the market crashes, should you panic? When the market crashed in 2008, it took about 10 months to go from the top all the way down and about two years to recover. What is 2 years compared to you 20 years horizon? Nothing! Absolutely nothing. So be buying and get rid of emotions. Buy everything you can, because there is a good chance that 2 or 3 years after, the stocks will be even higher than before. But be only buying proven companies so look at them how they behave during last recessions. Although scary, it is actually a great opportunity.

      • FI FighterNo Gravatar August 20, 2015, 9:30 am

        Martin,

        Great point — time horizon is a big consideration into anyone’s investing plan. If you have a longer window, you can afford to take more risks and each market cycle won’t have a profound impact on your ultimate results. Someone planning on retiring in 1-2 years probably shouldn’t be investing in the riskiest (but potentially most rewarding) equities.

        Take care!

  • MartinNo Gravatar August 19, 2015, 12:19 pm

    And it may get even uglier. Some say the market is consolidating, others that it is topping. I believe it is topping. So I now have two strategies (I think similar to you) – one is a money making strategy like monthly income = trading options, and I trade them against SPX only and the way that the zig-zag moves of S&P 500 don’t matter to me anymore, the second is dividend stocks and for those I would love the market to go down. I bought COP at 67 and thought it was a great price. Adding more shares at 47 would be even better price! So if it goes lower, I will be happy and pick up more shares for a lot better prices! I am happy about the current market. Offering great opportunities.

    • FI FighterNo Gravatar August 20, 2015, 9:31 am

      Martin,

      That’s a great way to looks at things — always from an opportunity perspective.

      I like both strategies — making money trading and picking up bargain bin discounts for the long-term portfolio.

      I love a good sale myself, which is why I’m being patient and waiting for the turn.

      Best wishes!

  • Dividend FreedomNo Gravatar August 19, 2015, 12:51 pm

    I was never good at timing the market, that’s why I am following the dividend growth strategy and aim to spend time in the market instead of timing the market.

    Though, I do feel that the shift to bear market is about to happen. Silver has been one of my darlings for some time. I own a small portion of tangible silver in coin form.

    I just feel that Commodities can’t keep falling further.

    Take care
    Dividend Freedom

    • FI FighterNo Gravatar August 20, 2015, 9:32 am

      DF,

      DGI is a wonderful strategy and it works well for many investors.

      Keep it up!

  • ChrisNo Gravatar August 19, 2015, 2:41 pm

    You can’t time the market & you certainly can’t predict the future. Never bet against Mr Market.

    • FI FighterNo Gravatar August 20, 2015, 9:34 am

      Chris,

      Keep on doing what works best for you!

      Mr. Market ultimately wins out, always, but there are moments when he loses his mind and sells off merchandise for pennies on the dollar. When will it happen? No one knows really, but I just do my best to follow trends… I could be totally wrong, but I’m willing to take that approach right now.

      Cheers!

  • Income SurferNo Gravatar August 19, 2015, 5:40 pm

    That’s one of my favorite things about you Fighter. You’re willing to do something different…..even if it’s something boring like waiting. We have a ton of dry powder that we’ve held out of the market for the last 18 months or so. I’m not smart enough to time the market, but I know myself just well enough to not get greedy until I see a target rich environment of low hanging fruit.

    I don’t know how the next couple years will turn out, but I know that I sleep great at night! Glad to see you are doing better 🙂
    -Bryan

    • FI FighterNo Gravatar August 20, 2015, 9:36 am

      Bryan,

      Thanks for the kind words! Appreciate the support buddy! 🙂

      Definitely, I’m with you there and keeping a ton of dry powder handy. Quite simply, it gives me the peace of mind that I need to be able to function everyday.

      I believe your patience will be rewarded. The EASIEST and my most preferred approach to investing is to wait for sales that are so obvious I can just about throw a dart at anything and make money. I definitely have no brains for investing, so I need every advantage that I can get! And low hanging fruit is just what I’m longing for right now.

      Best wishes!

  • DP @ Someday ExtraordinaryNo Gravatar August 21, 2015, 12:03 pm

    Never mind, I found my answer! Great page with some good market insight. I think copper is overdone. While demand may be shrinking, a shortage seems to be developing throughout the world, between labor strikes, weather, policy changes, etc. I just don’t see it staying down for too long, but it is a serious test of will power to stick it out through this bear cycle.

    I also don’t think oil will be down this much for long either. Demand is still increasing and at some point, the supply/demand fundamentals will need to return. As you mention, impossible to pick a bottom, but if you have the patience, some of these stocks could pay off huge in the medium term future.

    -DP

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