Summing Up The Week

The markets pulled back significantly – Should we be worried?

With the major market indexes pulling back substantially following new all-time highs and an overwhelming abundance of bullish enthusiasm in the markets, some long-term analysts are suggesting we might be in for a substantial pullback – even more so than what we’ve already seen this week.

In fact, some are predicting a market crash unlike any seen since 1929.

I spend a lot (okay, pretty much all) of my free time listening to podcasts and reading the views of stock market analysts. One of my favorite podcasts is The Rich Dad Radio Show with Robert Kiyosaki. Robert Kiyosaki made his wealth in the real estate markets and wrote one of the best financial mindset books I’ve read, Rich Dad, Poor Dad, which teaches the value of passive income among a myriad of other useful strategies.

On his podcast, Kiyosaki brings on a variety of traders, money managers, and analysts with varying views. However, in the past several episodes (particularly Super Bubble from August 26) the typically varying views aren’t varying that much – the  experts believe we’re in for a stock market crash.

In the Super Bubble episode, a long-term analyst uses data from as far back as the 17th century to analyze the markets and has identified a 90-year cycle that indicates we are in for a generational crash sometime in the second half of 2020 or first-half 2021. In the same episode, a short-term analyst sees the exact same scenario. Typically, short-term and long-term analysts disagree widely on near-term predictions; an agreement of this sort is unusual and disconcerting.

I’ve been investing in the markets for decades and the one thing I’ve learned is that it’s nearly impossible to predict what will happen – even from those with excellent track records – however, there’s no arguing that the market’s gains in 2020 have been unlikely given the global pandemic and international economic destruction caused.

If the markets are going to crash, what should investors do?

Let me start by sounding like a broken record – I am not a financial adviser and I encourage all readers who may be concerned to contact their financial consultants for advice and strategies.

While some analysts are advising retirees and those retiring within the next 5 years to pull all of their money out of the stock market, the decision on what to do with investments is personal to each investor’s goals and, more importantly, timeline.

Readers of my Investments in Play series may have noticed that I haven’t added to any of my positions in months, instead regularly taking profits as positions make new all-time highs. My long-time strategy has been to Sell in Stages as the market rises, and with the markets at these levels, we’re very much in a “Selling Season,” not a “Buying Season.”

In light of the growing opinions of experts that we are in for a major pullback – if not an outright crash – my cash position is nearing record levels. While I am never “all-in” or “all-out” of the markets, I am very cautious as we head into the Presidential Election, historically, a period of extreme volatility in the markets. In fact, I’ve even stopped adding to positions in my ETF retirement accounts for the past few weeks due to the frothy levels the market was holding until this week (although I do let my 401k contributions continue as normal, adding at regular time intervals regardless of market levels).

If you’ve been lucky enough to enjoy huge gains off of the lows made in March, I strongly urge you to reach out to a professional financial adviser to discuss what you should do next as we move forward. We are in unprecedented times, and the best approach you can take is to get as much information and hear as many opinions as you can in order to determine the right strategy for you and your investments.

With that, let’s look at the news that moved the markets this week…

Market News

Apple (AAPL) and Tesla (TSLA) Stock Splits

On Monday, both Apple (AAPL) and Tesla (TSLA) saw their stocks split.

What is a stock split?

A stock split occurs when a company decides the price of their individual shares has exceeded the interest of retail investors. Many retail investors are apprehensive of buying shares of a company if the price is in excess of $100 and much less if the company is $500 or more than $1,000.

In order to make the company’s shares attainable to normal people, a company may decide to split their stock. In Apple’s case, the stock split 4-for-1 meaning each shareholder now holds 4 times as many shares as they did before. If you held 100 shares before the split, you now hold 400 shares after the split.

However, during a stock split, the share price is divided by the same amount. In Apple’s case, the stock was trading around $500 before the split. After the split, Apple’s share price was reduced to $125 ($500 / 4 = $125).

A stock split doesn’t result in any increase in value, however, the fact that the share price is lower makes shares easier to purchase for smaller investors, often resulting in an increase in the company’s share price overall even though there was no actual positive catalyst outside of the split.

What was Tesla’s stock split?

Where Apple split 4-for-1, Tesla (TSLA) split 5-for-1. Shareholders holding 100 shares before the split received a total of 500 shares following the split. Accordingly, Tesla’s stock price was trading around $2,300 a share before the split and was reduced to around $460 following the split ($2,300 / 5 = $460).

Home prices see biggest gains in 2 years

Home prices in July were 5.5% higher than in 2019 according to CoreLogic, a reporting agency, reported CNBC on Tuesday. Analysts point to the average rate for a 30-year fixed mortgage falling below 3% for the first time as a catalyst for generating exceptionally strong buyer demand.

In certain markets, there is a nervous feeling of FOMO with buyers snatching up any available inventory as it feels to some as prices won’t stop going up. Having lived through the housing boom of 2000-2007 (I got swept up in the frenzy and bought my first house quite near the peak in October 2006 which turned into a disaster), I’d not jump into the residential real estate market at these levels.

As trite as it may sound, everything that goes up must come down, and the housing market will, too, drop in value eventually. In the meantime, experts believe we’ll continue to see rising housing prices into 2021 before pandemic buying wanes.

Weekly jobless claims better-than-expected at 881,000

The Labor Department reported 881,000 new jobless claims last week, better than the 950,000 estimated by Dow Jones economists, reported CNBC on Thursday.

In addition, continuing claims fell to 13.3 million, a drop of more than 1.2 million from last week. While some pointed to the lowering numbers as a sign of a healing economy, the number of unemployed Americans still exceeds the level of to qualify current conditions as a recession.

Despite the positive data, the markets sold off substantially during Thursday trading.

Payrolls increase 1.37M, Unemployment drops to 8.4%

The Labor Department’s August report showed nonfarm payrolls increased by 1.37 million throughout the month and unemployment dropped to 8.4%, reported CNBC on Friday.

Economists surveyed by Dow Jones were expecting growth of 1.32 million jobs with an unemployment rate decline to 9.8% in August from 10.2% in July, so the positive payroll report seemed to stem Thursday’s selloff, if only temporarily at the market open on Friday.

Despite the positive labor report, the markets continued Thursday’s selloff as investors took profits in the tech sector and the reality of the economic conditions seemed to set in.

Covid-19 forecasted to kill 410,000 in U.S. by January 1

A report published by the Institute for Health Metrics and Evaluation (IHME) at the University of Washington forecasts more than 410,000 Covid-19 deaths in the United States by January 1, 2021, reported CNBC on Friday.

The report goes on to say that the death toll could reach as high as 620,000 if states continue easing coronavirus restrictions. “The worse is yet to come. I don’t think perhaps that’s a surprise, although I think there’s a natural tendency as we’re a little bit in the Northern hemisphere summer, to think maybe the epidemic is going away,” Dr. Christopher Murray, director of IHME, told reporters on a conference call Friday.

The most likely scenario produced of the three IMHE projections (worst, best, and most likely) estimates Covid-19 will kill 410,450 people by January 1; the worst case scenario projects up to 620,028; and the best-case predicts 288,380.

“We are facing the prospect of a deadly December, especially in Europe, Central Asia, and the United States,” said Murray. “But the science is clear and the evidence irrefutable: mask-wearing, social distancing, and limits to social gatherings are vital to helping prevent transmission of the virus.”

Next Week’s Gameplan

Thursday’s selloff certainly displayed the general nervousness felt by investors with the market testing all-time highs in an era of uncertainty. Institutional hedge funds are taking profits and professional traders have stop-losses in place which could magnify any future selloffs, and, as I said in my introduction, many professional analysts I trust believe we’re in for serious downside.

Next week’s gameplan remains the same as any week – stick to my Trading Plan and see what the market has in store. We’ve been in a Selling Season for so long now, I can’t help but think a Buying Season may be incoming.

This Week in Play

Stay tuned for this week’s episodes of my two portfolios Investments in Play and Speculation in Play coming online later this weekend! 

Crytpo Corner

Bitcoin Price Action

Despite many Bitcoin enthusiasts attempting to argue the contrary, the digital currency continues to demonstrate it is not a store of wealth, trading in tandem with the stock market. Bitcoin’s weakness preceded the market’s Thursday selloff when Bitcoin started to drop on Wednesday. 

During Thursday’s stock selloff, Bitcoin and the rest of the cryptocurrencies sold off dramatically before BTC found support right below the $10k mark at $9,895.22, its new weekly low.

The Bullish Case

Bulls point to the $10k mark as the line-in-the-sand. Since Bitcoin held support near $10k, many bullish analysts suggest that the crypto won’t drop below that mark, instead using it as support as Bitcoin tries to prove itself as a hedge against the dilution of fiat currencies globally.

The Bearish Case

Bears point to the correlated selloff between Bitcoin and stocks as proof cryptocurrencies are just another investment, not a hedge against global uncertainty. The substantial failure of the Support of Last Resort trendline could point to lower lows with many bears eyeing the monthly low of $8815.01 made in June as the next downward target.

Bitcoin Gameplan

Current Allocation: 1.784% (+0.895% from last week)
Current Per-Coin Price: $10,608.48 (reduced -4.95% from last week)
Current Status: -1.420%

I adjusted my gameplan when Bitcoin started getting squirrely on Wednesday, removing my initial next buying target of $10,378 and raising my next buying target to $10,057.40. When Bitcoin sold off, it filled my limit order, adding another 0.895% to my allocation and reducing my per-coin cost -4.95% from $11,161.44 to $10,608.48 and leaving my position down -1.420% currently.

Given the potential for a significant selloff in the stock markets combined with Bitcoin’s correlated moves, I’ve adjusted my buying targets accordingly.

Bitcoin Buying Targets

Using Moving Averages and supporting trend-lines as guides, here’s my plan of buying quantities and prices:

0.892% @ $9539
1.338% @ $9067
1.338% @ $8829
1.338% @ $8657
1.784% @ $8058
1.784% @ $7787
2.230% @ $7409
2.676% @ $6687
3.301% @ $6219
4.906% @ $5828

Why the differing quantities at each level instead of a flat percentage?
Rather than buying an equal percentage, I change my buying quantity at each stage as a reflection of how likely Bitcoin could bottom and rebound from that stage. Rather than increasing my quantity on the way down, I’m used a fixed amount of money, so I’m basing how much I buy by how likely I think Bitcoin will drop to a certain level. In this case, I don’t think it’s likely Bitcoin will be able to break its $3128 low, so my quantities under that price point are less to account for the chances it will get to them.

No price target is unrealistic in the cryptocurrency space – Bullish or Bearish.
While traditional stock market investors and traders may think the price targets in the cryptocurrency space are outlandish due to the incredible spread (sometimes a drop of near -90% or a gain of up to +1000% or more), Bitcoin has demonstrated that, more than any speculative asset, its price is capable of doing anything.

Here are just a few recent price movements over the past couple of years:

• Bitcoin rose +2,707% from its January 2017 low of $734.64 to make an all-time high of $19,891.99 in December of the same year.
• Then, Bitcoin crashed nearly -85% from its high to a December 2018 low of $3128.89.
• In the first half of 2019, Bitcoin rallied +343% to $13,868.44.
• From June 2019, Bitcoin dropped -54% to a low of $6430.00 in December 2019.
• From December 2019’s low, Bitcoin rallied +64% to $10,522.51 in February 2020.
  
• In March 2020, Bitcoin dropped -63% to a low of $3858.00, mostly in 24 hours.
• From March 2020, Bitcoin rallied +224% to $12,486.61 in August 2020.
• Where will Bitcoin go from here? Truly, anything is possible…

What if Bitcoin’s headed to zero?
The only reason I speculate in the cryptocurrency space is I truly believe Bitcoin isn’t headed to zero.

I am prepared for that possibility, however, by knowing I could potentially lose all of the capital I’ve allocated to this speculative investment. Professional advisers recommend speculating with no more than 5% of an investor’s overall assets. Personally, I’ve allocated less than 2% of my assets to speculating in crypto.

I feel that anyone who doesn’t fully believe in the long-term viability of cryptocurrency would be better served not speculating in the space.

On a good day, this asset class isn’t suitable for those with weak stomachs. On volatile days, the sector can induce nausea in the most iron-willed speculator.

DISCLAIMER: Anyone considering speculating in the crypto sector should only do so with funds they are prepared to lose completely. All interested individuals should consult a professional financial adviser to see if speculation is right for them. No Get Irked contributor is a financial professional of any kind.