Keep Selling, I'm Buying

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.”

― Warren Buffett

The Sell Off

Today was one of those days, the DOW sold off 617 points (2.38%), the S&P 500 sold off 69.5 points (2.41%) and the tech heavy NASDAQ sold off 270 points (.18%). Even if you don't follow the markets regularly, these numbers probably caught your attention today.

Today's emails from readers, "Clay! Say something!" "No posts since April! Speak already". The market is full of pundits who cry the sky is falling everyday and then rejoice when a day like today finally occurs just to say, "See I was right". Those same voices are probably quietly buying shares of their favorite companies.

Clay's Rules

I don't proclaim to have invented these, but I've made them my own in order to stay disciplined. While there are many more in my book of rules, these 4 should serve everyone well today.

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolio go to zero, markets don't

Rule #4: When a good stock you own drops 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Trade War Fears

Today's sell off was not unpredictable, but was certainly over done. Over done means the selling is exaggerated and is creating opportunities for all of us who have long term horizons for our investments (1 or more years).

The long and the short of it is this, a tweet and a couple of passing comments caused the markets to sell off at an extraordinary degree. This is ridiculous, and unfortunately emboldens our President because the power of a tweet swings both ways for him. "We're near a deal" the market rallies, "I'm imposing 25% tariffs" market tanks. Let's look at some bell weather indicators to see how absurd today's sell of really was. The complete disconnect of the two examples below scream how foolish today's sell off really was. I can do this all day long or sector by sector, the results are the same; stupid is as stupid does.

Salesforce.com, one of the cloud kings and a productivity machine for mid-cap to large enterprises of all kinds sold off today -4.25% or $6.79 per share. Tech industries, such as software, are more or less immune to politics, or should be. Cloud software provider Salesforce.com CRM, has little exposure to China; there's no logical reason for CRM to sell off today except for the ETFs. Salesforce is in a myriad of ETF's and when those sell off to re-balance, companies like Salesforce sell off too. This is an opportunity to pick up shares cheap while CRM is mis-priced due to nothing related to their core business.

WalMart WMT however is a company with massive exposure to China. Try to find a product on WalMart shelves that isn't made in China, but today WalMart stock was only down 1.98% or $2.02 per share. But Clay, isn't WalMart in a bunch of ETF's too? Yes it is, but it's $170 billion dollars of market cap larger, so the balancing doesn't impact the stock price as much.

The 10 year bull market has seen the transports power higher providing the confirmation that we need as investors that this isn't a sugar high. Ultimately I believe that a Bull stock market can't be sustained without the transport stocks showing solid earnings and growth. Year to date the Dow Jones Transports Index is up +12.38%, that's a huge move for a bunch of trucking, railroad and shipping companies. Over the last 3 years DJT is up over 34%, and over the last 5 years the DJT is up over 30%. Why does this matter today? Simple, the transports sold off hard today. A group of stocks that produced fantastic earnings and provided great forward guidance over the last two weeks was sold off on fears of 25 % tariffs; like tariffs were a surprise and not already priced in.

The Fed is Back in View

The Federal Reserve is going to lower rates. There I said it, let the flame mail and unsubscribes begin.

Contrary to popular belief, Jerome Powell is not subject to the whims and tweets of the President. Powell is at heart and by training a banker and he will eventually succumb to the data and do what has to be done. The Fed has never been right at predicting a recession. The one group, with more access to economic data than anyone else has never once predicted a recession with accuracy, and yet the markets hang on every word from every Fed speech as though it were gospel. So let's predict the Fed using the Feds tools.

Currently the 2-year and 5-year treasuries are below the Fed Funds Range. Historically, this has been a bull horn pressed tight against the ear of the Fed to lower rates. Regardless of trade wars, Presidential tweets, politics or the stock market, the Federal Reserve will be forced to lower rates because the data says, "Just Do It". When the Fed lowers rates, expect to see the stock market rally and home mortgages and refi's to increase. With today's S&P close of 2,811 the market is now down 5% from the April 29 highs. Here's some food for thought, the difference between a 5% decline and a 15% decline is interest rates.

We never want to time the market, this blog is always about Staying Invested, but we do need strategies for deciding when to put money to work in the market. Was today the day to buy stocks? Is tomorrow the right day? Wednesday? One valuable tool is the VIX index, sometimes called the fear index. When the VIX RSI reaches 60 we say that fear is high. What's interesting is that the VIX doesn't usually spike above 60 and when it does is temporary. Today we saw the VIX rise to 20.55 with a Relative Strength of 66. The blue line in the chart is the VIX, the purple line below is the RSI and the orange background are Bollinger bands. In the chart depicted below, Bollinger Bands® bracket the 20-day SMA of the stock with an upper and lower band along with the daily movements of the stock's price. Because standard deviation is a measure of volatility, when the markets become more volatile the bands widen; during less volatile periods, the bands contract. As the chart shows the VIX broke out above the upper Bollinger band, an indication that the VIX should be coming down soon.

Based on this tool I think it's reasonable to start buying quality companies that have sold off hard; especially if its a company you already own, like, is unrelated to China and the current price is below your cost basis.

Inflation Fear

I like talking about the stock market, everything from macro themes to individual stocks, so any opportunity to talk about the markets I find entertaining. A common refrain I hear in the news and from people on the street is that the trade war with China is going to inflate prices and hurt individuals. I accept the conversation and respect others point of view, but I will emphatically deny that there is data to support this. Currently inflation is about 2%, a little less. To pick a year, in 1990 inflation averaged 5.4%, the S&P 500 was essentially flat by year-end; but by the end of 1991 inflation was still at 4.2% and the S&P 500 surged over 26%. If we think about to the 1970's and 1980's we can all remember periods with much higher inflation, but somehow U.S. businesses found a way to grow. 1980 in particular saw the average inflation rate at 13.5 and a few months were in excess of 14%, yet the S&P 500 turned in a remarkable +19.25% return.

Inflation is not the enemy of the economy, we are. Our own fear of what we think we can't see ahead is making us fear the worst and our actions will make our worst fears come true if we don't take control of ourselves.

For every action there is a reaction. The U.S and China raise tariffs and ultimately cause inflation to tick up. Reaction, the Fed will lower rates more. The 100 basis point drop in rates is fueling new mortgages and refinancing at a significant level. All those millennial's who have put off buying homes, cars and making other major purchases; the stuff that really fuels the U.S economy, are buying now and will be buying even more with lower rates. I think millennial's may be more patient then their Baby Boomer parents. The bulk of our economy is driven by consumption and not even a tweet by Kim Kardashian or Farrah Rizzo can drive consumption as much as buying a house.

Admittedly there is way too much debt in the system, not just here, I think its a global problem. While earnings have been fueling our growth, debt is playing way too big of a role and needs to be reigned in, significantly reigned in. So eventually the tariffs will find their way through to consumers, the cost of goods will tick higher and the Fed will get what they've always wanted, higher inflation. Higher inflation will be countered by lower rates, spurring more investment and consumption. The Presidents public cry's for lower rates is simply theater for political gain. His advisers see what I'm seeing and are saying, "get ahead of this". So the president calls for lower rates, eventually data forces the Fed to lower rates and the President gets a public opinion win with his base. The Fed may look like a puppet but I think they will simply be responding to data.

What's Next

The blog portfolio has a lot of dry powder that needs to be put to work. With over $50,000 in cash I expect I'll be doing some buying this week. The portfolio is up a respectable 6.44% year to date on the worst day of the year. I'm optimistic about the rest of the year.

Stay Invested,

Clay

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Keep Me Honest

S&P 500 declines to 2,350 or more (1-3-2019)

Healthcare and Biotech sectors outperform (1-3-2019)

S&P reaches 3,000 by year end (1-11-2019)

CSCO reaches $60/share (1-18-2019)

VEEV reaches $145/share (2-14-2019) (achieved $145.23 on 5-10-2019)

CVS reaches $91.50 (2-27-2019)

Bull market takes another leg up (4-7-2019)

The Fed will lower rates (5-13-2019)

Clay's Rules

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolio go to zero, markets don't

Rule #4: When a good stock you own drops 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:

CVS, CSCO, VEEV, STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved