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Which Tech Stocks I Plan to Buy When the Market Crashes, and the Entry Price Levels

After more than 10 years of patient waiting and accumulating my cash reserves, I am finally seeing some possible signs of the start of a market correction.

If you have been watching my videos, you will know that my ultimate investing strategy is to wait for a big crash before going all-in to scoop up cheap stocks for the long-term.

Many people have been asking me if the crash is over, but since there is no consensus, things could go either way at this time.

 

General Market Trend:

This chart here shows the worst case scenario for the S&P 500 (weekly chart), and if the market really does go all the way down, then it will trigger the entry prices for many of my entry prices for the stocks which I intend to buy.

However, as prices are unpredictable, I plan to scale in and buy in bits and pieces, adding to the positions which I already have.

 

Let’s take a look at some of the potential drivers for 2019.

Bullish factors:

  • US policies to boost economy ahead of elections
  • Tech advancements to improve productivity
  • Brexit cancelled?

Bearish factors:

  • Interest rates increasing and more hikes to come
  • Trade war with China
  • Nuclear threat of North Korea
  • Brexit woes
  • Falling U.S. corporate profit margins
  • Record high U.S. corporate debt
  • Illiquidity in the U.S. corporate bond market
  • Extreme, costly climate events
  • A eurozone crisis
  • Europe needs negative interest rates to fight recession
  • Loss of jobs due to tech advancements and automation
  • High inflation in emerging markets

 

My preferred sector is the tech sector, especially after my 1-month trip to Silicon Valley last year.

 

Why Focus on the Tech Sector?

  • As more jobs get automated, the surplus gains will go to the big tech companies
  • Tech companies will expand by buying up the best of the non-tech companies
  • I read somewhere that in 10 years there will only be 100 companies, and in 50 years there will only be 10 companies
  • I prefer to pick the big ones because they will “eat up” the smaller ones

My Top Picks & Entry Price Levels:

  • Facebook (FB) – Entry price: $80
  • Google (GOOG) – Entry price: $750, $600
  • Amazon (AMZN) – Entry price: $1000, $700
  • Apple (AAPL) – Entry price: $130, $100
  • Microsoft (MFST) – Entry price: $85, $60
  • Netflix (NFLX) – Entry price: $200, $125
  • Tesla (TSLA) – Entry price: $250, $180
  • Baidu (BIDU) – Entry price: $130, $90
  • Alibaba (BABA) – Entry price: $110, $85
  • Tencent (700) – Entry price: $220, $170

Do note that these are the “worst-case” scenario prices, and it is quite likely that prices may never reach there, so I plan to accumulate along the way and add to my portfolio.

 

Other notable potential IPOs in 2019:

  • Slack
  • Palantir
  • Stripe
  • Airbnb
  • Lyft
  • Uber
  • Didi Chuxing
  • Toutiao

 

I am pretty confident the next wave of financial and economic gains will go mainly into the tech sector, with the focus on applications of AI, machine learning, data science into every aspect of our lives. The biggest winners will be those who own the algorithms.

That said, there will also be risks, such as increased regulation or anti-monopolistic backlash, which could negatively affect the stocks.

Good luck, and get ready to buy and hold for the next 10 years! 😀

3 Crucial Lessons From Jesse Livermore – The Greatest Stock Trader of All Time

Jesse Livermore is known to be the most prolific stock trader. Several books have been written about him and his trading track record is legendary. His profits were so great that he was reported to have owned mansions in various places around the world, each fully staffed, complete with limousines and steel-hulled yacht for his holidays.

Some of you might have read that Livermore was worth $100 million after shorting the 1929 great market crash.

Above: Some of the books about Jesse Livermore, available in major bookstores.

What Guidelines Did Jesse Livermore Follow As A Trader?

Among the many quips he had about trading and investing, I’ve picked out some of the key ones that could make or break your trading account.

While many complain about the difficulties in trading forex, stocks, or commodities, there is a good minority that makes consistent profits in the markets.

What sets Jesse Livermore apart from his peers?

 

  1. Buy rising stocks and sell falling stocks.

The above seems obvious, but many people fail to adhere to this rule. Many people like to ‘pick tops’ and ‘pick bottoms’. Now, professional traders do occasionally try to pick tops and bottoms, but they do so with very strict risk management, and always have a contingency plan for when the trade doesn’t work out.

Beginners often makes the mistake of trying to trade against the trend. While this can be profitable for some, talk to anyone in the trading industry and they will tell you that trend-following is the major money-making strategy that every trader uses. It’s simple, easy to add positions on, and it’s stress free. The problems come when beginners make a buck from trading with the trend, and start to explore ‘new ways’ to trade and invest.

 

2. Keep trades that show a profit, end trades that show a loss.

Jesse Livermore is famous for his humongous profits, but behind every profitable trader is the admirable ability to deal with a string of losses. It’s one thing to know that you need to cut losses, but it’s another to actually cut your losses when you are wrong. George Soros famously quips that it is not how many times you win or lose, it’s how much you make when you win, and how much you lose when you are wrong.

Cutting losses is a psychologically hard thing to do in modern society. We’re ingrained to be always correct, and never admit that you messed up, because it reflects badly on you as a person. However, with investing, no one is marking you for the number of losses; the profit that you make is the final report card that matters, and that’s where we want to be focusing on.

 

3. Never average losses by buying more when your stock has fallen.

Too many people refuse to be wrong on their investments or trades.

I have heard of people say this statement: “Even if the stock drops a lot, I’ll just keep it because I’m buying for ownership and dividend cashflow, not just for capital gains.” Sure, but what happens if the stock you hold drops by 70%? 80%? You’ll buy more?

Buying more when the stock has fallen is a sure-way to get your trading account to zero. It’s taking more risk when the odds are against you.

 

Think About This: Which of These 3 Guidelines Have Brought You Losses in the Past?

Many traders soon realize early in their career, that their trading accounts could have been profitable if not for silly mistakes. Avoiding these silly mistakes requires experience, maturity, the correct knowledge, and of course, proper mentoring.

I was lucky to be mentored by veteran traders early on in my trading career. Their advice, based upon thousands of hours of market experience, contributed greatly to who I am today, and I never fail to mention, during trading seminars or public events, that by tapping on their experience, I was able to quickly attain a level of success that kept me profitable.

If you’re currently struggling as a trader, ask yourself this question: “Which mistakes have I been making?”

Acknowledging trading mistakes is a continuous process of learning and growing.

Will Higher Interest Rates Eventually Lead to a Stock Market Crash?

asJanet Yellen’s actions come into the spotlight once again.
Source: slate.com

 

After a slew of unprecedented events (Trump, Brexit), what has been troubling the world financial markets in recent days? As the FOMC announcement approaches, market participants have all eyes fixed on the almost-certain rate-hike that is coming up on Thursday. You probably have started to see Yellen’s photograph in news articles across all major financial newspapers.

Traditional economics theory teaches us that when interest rates rise, they are deflationary; businesses find it harder to borrow and affects interest-sensitive investment, while home owners find it harder to pay their mortgages. It all seems reasonable on the surface, but what actually goes on behind it?

In an economic climate such as ours today, traditional predictions have fallen very flat. There are Fed officials and scholars (not lay-people) who still insist that QE has no impact on the real economy whatsoever. The average wage-labourer probably doesn’t feel much when interest rates change, nor will he care even if rates drop or rise significantly.

However, as traders, our portfolios are at stake and it will bode us well to study this properly. Several macroeconomic indicators have to be understood and analysed to understand what is likely to happen. I’ve broken it down into 4 components for easy reading. Let’s get going:

INDICATOR #1: Falling GDP?

The body of scholastic material addressing the link between interest rates and GDP is rather depressing. Stephen D. Williamson summarizes this rather aptly:

“There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity”-Stephen D. Williamson, St. Louis Fed Vice President

When the cost of borrowing rises, economic activity slows. That has been what the Fed was trying to do when it goes ahead and raises interest rates. They were used as a deflationary tool to keep the economy from expanding too rapidly. What have we seen? I came across this table while researching on this topic:

bank

What we see is that the average rate hike cycle takes 22 months, while a recession normally happens 41 months later. However, it has been 87 months since the last rate hike, eclipsing even the 85 months lag time since the 1994-1995 rate hike.
These are definitely unusual circumstances. While the economy has been chugging along for 7 years despite near-zero interest rates, I don’t see how a rate hike would dramatically change this, especially in the short-term (1-2 years from now). While the economy has been a big topic on Trump’s agenda during the election, the reality is that the economy is still reeling from the damage caused in 2008, and it could take far more than more investments to bring the world back to economic health.

 

INDICATOR #2: Lower Stock Prices?

The US stock market has been breaking new highs and with every new high, another analysts comes out and purports that ‘this is the top’.

 

econDire predictions by an economist.
Source: CNBC

However, before we all go into doom and gloom, let us remember that the bear markets of the last 50 years have had different causes, to be fair, there had to be some sort of trigger. It could be a political issue, such as the 1973-74 oil crisis, and the 1990 bear market caused by Iraq’s invasion of Kuwait. Furthermore, the Fed could be behind a market crash; in 1982, after raising interest rates relentlessly, the U.S market saw some severe bear moves in that period of time.

Sometimes bear markets happen because of bubbles; such as when the 2001 dot-com bubble and 911 terrorist attacks came about. In 2008, we saw a market crash as a result of a tanking housing market spurred by widespread institutional dishonesty.

Let us not be quick to jump to conclusions about a market crash coming. I’ll be watching the S&P and other indices closely over the next few months.

Interestingly, some quip that the “three steps and a stumble” rule would become a reality. It last happened in 2004, but we didn’t see a stock market crash until 4 years later.

“The ‘three steps and a stumble’ rule states that after three consecutive rate hikes (three steps), the stock market would begin to fall rapidly (stumble).”

I don’t quite buy into this idea. Over the past 30 years, there were only nine occasions where we saw 3 rate hikes in a row. Thrice in the 1970s, four times in the 1980s, and twice in the 1990s, and on average, only the 1970s saw a significant decline (approximately 10%) of the stock market in the next year or so.

chartChart of DJIA price changes after 3 rate hikes
Source: MarketWatch.com

More interestingly, the S&P500 looks like it’s ‘toppish’; the bull run seems rather unsustainable, but something seems to be sustaining this euphoria. On a technical basis, it has simply broken out of an expanding wedge on the daily chart.

sp
The S&P500 has broken out of an expanding wedge pattern. It looks rather unsustainable, but it is happening before our eyes.
Source: MetaTrader 4

We’ll have to watch closely how the S&P behaves near the resistance before deciding if it would continue the rally (which is very possible!).

 

INDICATOR #3: Volatile Bond Prices?

There are signs that the market has already adjusted to an interest rate hike. Check out what happened to the 30-yr Treasury Bonds over the past year or so:

30yr

The 30-yr Treasury Bonds have fallen 15% since its last high in July 2016.
Source: MetaTrader 4

The rude correction has shocked many bulls out of the market, and it seems we have entered bearish territory in the bond market. My opinion is that the rate hike has definitely contributed to this, but it seems that the rate hike is a mere response to the macroeconomic conditions of the world. On the technical side, we see a head and shoulders pattern that has broken down (as a result of election fever), and the downtrend has continued somewhat.

yieldsShort-term yields have risen almost as much as long-term yields.
Source: Bloomberg

If you’ve studied finance in university you would immediately recognize that the yield curve has flattened. Check out the table above; 3-month rates have risen as much as 30-year rates! This means 3-month yields have risen more than 100%, while 30-year yields rose about 10% or so. This is a typical response when the Fed tightens monetary policy.  A famous interpretation of the yield curve states that when yield curves get inverted (when short-term bonds yield more than long-term bonds), that’s when the stock market crashes like nobody’s business.

We are still very far off from an inverted yield curve, so a market crash is still some distance away. My guess is that the bond market, as a measure of fear, will be in a state of confusion as there are valid reasons for economic strength as well as economic panic. Volatility in yields is likely to be the norm in the year ahead.

INDICATOR #4: Commodity Prices

Although some pundits claim to be able to predict how interest rates will move commodities, I beg to differ. Oil, for example, is very much output driven (think OPEC), and recently we’ve been having output cuts among producers. As you can see in the image below, when I checked the newsmap yesterday, ‘Oil Surges as More Producers Join Output Cuts’ was the most-read news of the day.


A casual glance at the NewsMap reveals a heightened focus on oil production.
Source: Newsmap.jp

Generally speaking, if you look at the relationship between oil and real interest rates, we see very little correlation even over the very-long-term.

irIt’s hard to come to conclusions about how interest rates have affected commodity prices globally.
Source: cobank.com

More recently, we’ve seen commodity prices tank over the past 5 years despite interest rates remaining almost constant. I just did a simple google search on the price of DBC (the global commodity price ETF) and this is what happened in the past 5 years.

commm
A quick glance shows that commodity prices have fallen for 5 years.
Source: Google finance

To make an investment decision on commodities solely on interest rates isn’t wise. On a technical basis, commodities look like a good buy and I’ll be watching them closely to spot trading opportunities.

UP NEXT: THURSDAY’S RATE DECISION

If you aren’t already riding the bull market in stocks, it doesn’t make sense to enter now. Heroic bulls would want to enter now with a small profit target, and the world will be watching closely how the new year starts. Moreover, you won’t want to have too much exposure during the final FOMC meeting of 2016. Volatility on all other asset classes are expected, and I’ll be trading currencies, perhaps more regularly on an intra-day basis if I can’t find any good longer-term trends to ride on. All eyes will be on Thursday’s Rate Decision and the price action in the aftermath will be worth watching.

RESEARCH SOURCES & REFERENCES

http://www.cnbc.com/2015/09/15/when-the-fed-raises-rates-heres-what-happens.html
http://www.cnbc.com/2015/08/18/st-louis-fed-official-no-evidence-qe-boosted-economy.html
https://www.thestreet.com/story/13279476/1/what-happens-when-the-fed-hikes-interest-rates.html
http://www.slate.com/content/dam/slate/blogs/moneybox/2015/11/23/janet_yellen_responds_to_ralph_nader_s_sexist_letter/495620136-federal-reserve-chair-janet-yellen-testifies-before-the.jpg.CROP.promo-xlarge2.jpg
http://www.cnbc.com/2015/08/24/8-things-you-need-to-know-about-bear-markets.html
http://www.cnbc.com/2016/12/10/economist-harry-dent-says-dow-could-plunge-17000-points.html
http://www.marketwatch.com/story/edson-goulds-three-steps-and-a-tumble-rule
https://www.thebalance.com/inverted-yield-curve-3305856
http://www.cobank.com/Newsroom-Financials/~/media/Files/Searchable%20PDF%20Files/Newsroom%20Financials/Outlook/Outlook%202012/Outlook_10122.pdf