How many legs the market has?

I just came back from vacation in Seattle and Vancouver last week and it was really great to see quite a few friends in person over there. My sincerely thanks to all those I met for their warm hospitality!! While I was busy on the road constantly and could not really watch the market closely most of the time, I was paid off well still by betting for some significant downdraft of the market. It is a great day today with good profits by doing so although I was a bit earlier as usual. Here is why.

“....the market god is playing with us again by fooling as many people as possible into thinking that the mini correction has been done... Then it will suddenly strike again............So folks, don’t just discount the strong possibility of another leg down in the next week or two.”  This was my warning 10 days ago and I was expecting a sudden mini crash down towards the 50 DMA around 2677 or even the 200 DMA around 2630. I immediately got a laughing question from a friend kidding me how many legs the market would have. Apparently he and probably most people simply didn’t believe my warning for another somewhat severe decline ahead of us a week ago when the market was seemingly doing quite well. What was the reason to worry about the downside risk, many folks were asking? Well, we got the taste for the downdraft today. S&P touched exactly its 50 DMA around 2677.  So how many legs we will see from the market, either up or down? The simple answer is I don’t know. One thing I do know for sure is that the market is definitely not a two legs animal but a multi-legs creature. And its leg up or down is very much associated with the herd mood in an opposite direction: when the herd becomes happy and euphoric, the market wants to punish them by legging down. Vice versa when the herd becomes depressed and outcrying, the market will surprise them by legging up. Since the herd mood keeps changing, so is the Market. Therefore there is no set number regarding how many times the market can go up or down in any time window. This current second rare sell signal has caused over 50 points down from its recent high. It is not as severe as last one with a 100 points crash just a few weeks ago but  is still severe enough to punish those overly euphoric just a week ago I think.

Similarly I made another bold prediction about crude oil when it was red hot in the past few weeks. It reached to $73ish at its highs recently and all the dumb money was betting long for it.  As I said, I also think oil will go up a lot as its long term trend in the next year or two but its next major direction in the near term should be down, not up and I expected for a 10-15% correction. Well, oil is again moving in my direction now, down to around $66ish as of today. If you haven’t read my blog on this call, check it out here. I got a question whether this oil correction is done already.  The decline in the past few days has been quite fast and severe, at least being felt so. I won’t be surprised to see some attempts of bottom fishing to come in to try to push up oil a bit. But I don’t believe the oil correction is done by now. Low 60s is a very reasonable target for this correction. I’d like to see a technical setup suggesting a bottoming and more ideally associated with a depressed mood from the dumb money running away from the oil sector. It usually takes time, maybe a few weeks before the picture is finally clear.

By the way, I get questions from time to time whether it is fine to share my blogs with friends. Well, if you like what I’m posting here, feel very free to share with your friends at your wish. No need to get my permission upfront. Actually I’d like to thank for your interest and spreading out and promoting my blog to a wider audience!!

Will FDA turns down a life saving drug?

I betted on Achaogen (AKAO) for its leading antibiotic, plazomicin, a few months ago (see here). As I said, drug-resistance bacterial infection has become a serious problem in the world and the potential market for it is huge if such antibiotics can be commercialized. Plazomicin is such a drug under development and is not under the FDA review for approval. Achaogen submitted two indications for the drug, one for complicated urinary tract infection (cUTI) and the other for BSI (blood stream infection indication. On May 2, the FDA held an advisory committee meeting to assess if the drug was safe and effective for the two indications. For cUTI, given the very strong clinical trial data, there was a unanimous vote in favor of approving it. Unfortunately the vote for BSI was not favorable (11-4 against it). The market reaction was obviously very negative, driving the stock down by 26% following the vote. But I think this is an overreaction and I still think there is a chance the drug may be approved for both indications for the following two reasons:

• The main issue for the negative vote for BSI is lack of sufficient data. Indeed, due to the lack of patients available for this very serious indication, the company could only enroll 69 patients of the originally planned 360 in the study CARE, including only 17 evaluable subjects treated with plazomicin. Strictly the committee was right due to the lack of sufficient clinical data. The thing is BSI is extremely serious with very high mortality without much alternatives. Among this small cohort of patients, plazomicin achieved a relative reduction of 71 percent in all-cause mortality at 28 days versus placebo, an amazingly strong indication of its effectiveness for a serious life-threatening disease. While ideally it is always better to have sufficient patients with stats power to demonstrate the safety and efficacy, in reality for serious disease or rare disease, it is simply not always possible. As such, such indications may still be approvable under exceptional circumstances. We have seen such precedents enough times before.
• Even if the BSI indication is not approved, it is almost a given that the drug will be used off-label for the indication due to its strong efficacy and lack of other alternatives.

Considering the above, I think there is a good chance the FDA may approve both with a mandate for the company to do more studies for BSI. Certainly there is no guarantee but I do believe so. The FDA decision date is Jun 22 but it could come earlier.

So how have I played with AKAO? Well, based on what I have seen, I have been a bit aggressive to bet for AKAO with both long calls and put selling. Fortunately when the advisory committee meeting was approaching, AKAO was elevated quite a lot with many people anticipating a good result I supposed.  So my naked puts had gained about 90% with a profit more than the cost I had for the calls. Due to the high risk involved, it would be stupid for me to still keep the naked puts that had not much left to gain but could easily be wiped out due to the potential negative results. So I did close my puts that have more than enough to cover my calls. I have been just playing the calls for free with some good gains already realized. Obviously due to the overreaction to the partially negative results, my earlier paper gains from the calls have all been wiped out but I’m still holding it. I think there is a good chance I may still get more upside gains from it, considering the chance of a full approval for the drug is not negligible.

Oil is heading higher but....

Fours years ago when oil hit and broke out the $100 level, I started to talk down oil. Don't believe me? See my famous call: Oil is going to drop😄😄 Since then, I had been consistently bearish as a long term oil trend in most of the past 4 years. I was even calling for $20 oil. It didn’t go down that much but close enough as it briefly dropped below $30 during this enormous downtrend. But since early this year, I have started to notice some clear technical evidence suggesting oil has likely bottomed and is poised to move up. Now oil has broken out through the $70 resistance and is clearly in an uptrend. I can confidently say oil is indeed out of the woods and in a sustainable uptrend moving forward. There are many reasons but mainly due to the supply and demand ratio in favor of oil to the upside. After two years brutal correction, many oil companies could not survive and have been knocked out permanently. For those surviving the crash, their oil production has been largely cut back. So we definitely see a lot less oil coming out now. Nevertheless, from the other end of the equation, we are starting to see more demand due to recovering economy globally but especially in the US thanks to Trump’s economy stimulus policies and tax cuts. Then come with the geopolitical uncertainties in the Middle East that may further cut back the supply side. And finally, there is one another one time oil stimulus factor that is very unusual but powerful to put a strong bottom for oil. Let me first ask you, which is the world largest oil company? You may easily think about Exxon Mobile which is indeed the current largest public traded oil company. But its crown won’t be kept long. The largest one, I’m sure many of you don’t know, is Saudi Aramco, the world's largest energy company wholly own by the Saudi Arabia government as of now. However, it will soon become a public company as the Saudi government is planning to do an IPO for Aramco in NASDAC, which is going to be the historically largest IPO ever, estimated to be worth $1-2 Trillion. So you may ask why this IPO has anything to do with oil prices? Well, if you don’t know yet, Saudi has an enormous influence on the oil countries organization, OPAC, which can effectively “manipulate” the oil prices by playing the production increase or cut game. I guess it can easily be understood that Saudi wants to have a high oil price for its IPO with Aramco and it is reported that Saudi is aiming to have an $80 price tag for that. Due to the significant volatility of the oil prices, they have postponed the IPO towards end of this year or even next year. This will give them enough time to try to “push” up the oil prices. Of course, ultimately the market will determine the price but at least with Saudi/OPAC, there is a good floor to support the oil price to minimize its downside risk.

With the above in mind, I think the long term trend for oil is up, probably a lot higher than the current price. But, this is a big but, can we simply expect oil to jump high straight line now? I really don’t think so. I think the near term trend for oil is likely downward and we may see 10-15% decline of oil prices in the next few weeks before it can march higher towards $80. One major reason for my bearish view on oil at the moment is the euphoric sentiment in the market now. Per the recent COT report, the bullish bet from the dumb money (speculation traders) has reached the historically high level, which often is a good contrarian indicator to expect lower oil prices moving forward. Similarly, I think oil stocks will have some tough time in the near future.

A long term risk that should not be overlooked

First of all, let me  just repeat again about the direction of a stock or the market when I talk. Any such trending should be understood in the right context. The market is very fluid and dynamic and the day to day changes are extremely volatile and difficult to predict. Oftentimes, the short term direction for a stock or the market can be totally contradictory to its longer term direction, which is very common and normal.

So today’s topic is about the long term trend as the subject already indicated. While I have been cautiously bullish for the market for the next few months or each a year or so, my long term view on the market has become quite bearish actually. As I said many times here, the current booming economy in the US and around the world is based on debt driven fundamentals. All the countries and most of the companies are borrowing money as if there will be no tomorrow. The historically low interest rates in the past 10 years have made such a crazy debt creation a non-issue till now. Indeed, who cares how much money is borrowed when there is close to zero interest they need to pay? But can we really think we can continue the free lunch forever? Don’t be too stupid to believe that. A reckoning day will come for certainty and this day is approaching closer and closer each day. When interest rates start to increase, which is already happening now, it will start to add cost to all the businesses borrowing money and to the governments as well. Initially it will just be a little bit but manageable pain to handle but when the interest rate reaches to certainly point, e.g. 4% or higher, it can bring down all the debt-burdened businesses to cause enormous chaos and we will see a financial crisis that will make the 2008 crisis like a beach walking. In my mind, this is not if but just when. I have talked about the potential long lasting bear markets in the future (see here).  Interestingly I saw something similar but in a different perspective. The paper is in Chinese: “前两次美国失业率跌破4% 都出现了经济衰退(details here)”, which means economic recession occurred two times before following the unemployment rate dropped below 4%, one in 1966 (that triggered a 15 years long bear market)and the other one in 2008 that triggered a 50% market crash.And then here is what  Jamie Dimon (JP CEO) just said: Economy is ‘strong’ but odds for another recession are ‘100 percent". Another dire prediction is coming from the famed legendary investor, Jeremy Grantham. He is not someone you should easily ignore. Per the Wikipedia, Grantham is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets, and is particularly noted for his prediction of various bubbles. He has been a vocal critic of various governmental responses to the Global Financial Crisis. Grantham started one of the world's first index funds in the early 1970s. What Geantham thinks about the future? Not so pretty as well: Grantham Forecasts Rough Seven Years for Equities, Bonds as reported by Bloomberg. Actually he is predicting negative returns for the next 7 years.     

Since I’m so bearish for the long term stock market future, you may ask what I’m doing with my money to hedge against the potential enormous risks. Two principles I strictly follow for my own asset management:

• For my long term investment, I don’t look for high growth stocks at all as they are typically high debt companies in order to fund their fast growing businesses. Many of them will face deadly blow when the interest rates jump too high. Don’t forget, just back to early 90s, the long term interest rates had reached as high as 18%. It will just be a killing to all the companies borrowed heavily for their businesses. I’d rather hold a bunch of quality stocks that are very strong financially and have a decades long track record to pay increasing dividends. As I have just demonstrated recently (see here), you don’t need the stock to go up for making a killing amount of money over time. All you need is your patience to let the stock do its magic by reinvesting the dividend. And actually lower stock prices will even help you make more money over time. These are exactly the stocks I want to hold during long lasting bear market, if it indeed hits us. I’m convinced it will come sooner or later and I’m building up such a long term portfolio starting 10 year ago. If you care about your financial future, start to do this now. When you start to feel the pain by waiting for the headlines telling you a bear market is coming, it will be way too late. Just remember, compounding wealth growth is not about high growth rate but long-term slow growth for many years and eventually it will trigger an explosive up run. The magic moment typically happens around 15-20 years after you hold and reinvest the dividend of a stock. If you think this is too long and cannot wait for that long, just think about the fact that Buffett has made the vast majority of his wealth only after he was 50s (see here). He is worth $70 billion now but he only reached his first $1 billion when he was 56. Folks, don’t believe you can make millions if you are already in 50s or even 60s? With the right strategy and patience, most of you can easily make the dream realized during your lifetime! Don’t be fooled by someone telling you that you can only make money by chasing high flying stocks. Actually it is the opposite for most of people that this strategy will only make you poorer not richer over a long run.
• The second important principle I follow is to avoid a stock-market-based long term strategy that is out of my own control. The most relevant one to me is the life insurance policy. I have talked quite a lot that I’m a big fan of a specially structured Whole Life based life insurance that is guaranteed in return but with a substantially reduced cost to set up. Just a quick note here that I’m not talking about the traditional WL which is indeed very expensive to set up. So don’t need to come back to advise me how expensive WL is. I have set up my WL costing me more than 50% less with all the features I’m looking for: guaranteed tax-deferred return with potential of even much higher dividend returns during high inflation era (which is coming in the next 10-20 years). And all the cash values built up can be used tax free for my retirement and legally protected that can be passed on to my loved ones tax free at death.   
  I often got questions from some friends asking while I was not interested in the fancier and highly promoted life insurance like Indexed Universal Life (IUL). I hope you can better understand why I don’t want to have IUL at all. I’m pretty sure IUL has been doing great in the past 10 years or so but I think it is probably the worst time to buy IUL now given my long-term bearish view on the stock market. The problem with IUL is its uncertainty. People often got confused about the downside protection highly talked about for the IUL and thought IUL will never go down as its worst return will be capped at 0% if the market is going negative. It is half true when you are talking about the investment portion of the policy. But don’t forgot about the nature of IUL: it is an annually renewable term life. As such, the cost for term life will only increase year after year for the policy and will increase substantially higher when one gets older. This cost part is not market based feature and will guarantee to increase regardless. The worst case scenario will be the market is not doing well for prolonged period of time, which is what I expect to come with a high probability, and you get no return at all from the investment portion but the cost for the policy is keeping going up. Eventually this may cause the policy elapse or kaput. If you don’t believe this, just ask your agent to show you the fine print and see if there is such a statement to the effect that there is no guarantee for the policy return with the risk of elapse. You may pay big money upfront to guarantee the policy will never elapse but it will negate the whole purpose of low premium and high return/protection. Just be clear, I’m not against IUL at all, just like I’m not against trading with stocks at all. If the market is doing well, IUL could be a good policy for you indeed. The problem is its long term uncertainty embedded in the design. I don’t want to be told that my money is no longer available after 15-20 years of paying premium, especially when I’m already in 70s or older. I’m not saying every IUL holder will run into this problem but the risk is certainly there for everyone. So, sorry, I’m not putting my serious money into IUL at all. If you want to rely on the stock market to generate income, you will be doing much better with the dividend reinvestment strategy. For long term it is actually extremely safe as long as you are careful about the getting into the quality dividend stocks you hold. I know I may be offending some IUL agents by talking about its risks here but I think it is the right thing to do for me to spell out the potential risks when I see for anything, especially I have been constantly asked about WL vs IUL.  I was burned more than 10 years ago by a universal life policy and ended up losing most of my money after 10 years of paying premium. I just wish I could have been told about the potential risks associated with UL back then. I know IUL has improved a lot compared with the traditional UL but still it has its uncertainty that can never be avoided due to the nature of any UL policy. If you don’t care of the market risk, then no problem to go with IUL. This is similarly a choice of going with the floating mortgage for long term if you don’t care how the loan interest rate will change. But if you want to be sure about the long term outcome, then IUL will not be a good choice, at least based on my understanding of it. Since I’m very bearish for the long term future of the stock market, I won’t touch IUL at all for my money. 
  
  
  
  
  
  
  
  

That's it?

A week ago, I spotted another sell signal and argued that we might see another selloff. Here is what I said: I’m expecting more downside next week! It could be just a brief and shallow 1% quick drop or it could be as severe as last time with 100 points tank. We will see when it happens. But I don't expect a long lasting correction as of now. The overall trend is still upwards moving forward. This is to just kill those overly euphoric herd who are chasing highs without knowing the risks involved.


We got a 30 points drop last Tue. Since I already said that I didn't expect a strong selloff, it will be convenience for me to just argue now that this is the correction I was looking for and that's it. But I must be honest with you that I'm not so sure yet. Since this is kind of rare sell signal, it typically involves a selloff in the range of 50-100 points for S&P per the history. And I was really also looking for some panic in the market which didn't show up at all. This leads me to think that the market god is playing with us again by fooling as many people as possible into thinking that the mini correction has been done and all is fine now. Then it will suddenly strike again. Let's try to get some hints from the technical side whether this is a reasonable speculation. See below the S&P chart. As you can see, S&P is showing a clear upward channel since early April. It hit its top band last week, a strong resistance for which I warned for a potential correction. It did come down a bit but it is very possible that it will continue to go down in the days ahead at least towards its 50 DMA at 2677. If enough panic is triggered by this move with another 30 points or so, then we may see the correction finally done. But if a more severe correction is coming, then it may very well just go all the way down towards the bottom of the channel, which is by coincidence perfectly lined up with its previous downtrend line (yellow) and its 200 DMA at about 2630ish. So folks, don't just discount the strong possibility of another leg down in the next week or two. I cannot tell you which one is more likely at the moment as it all depends on the sentiment and TA when we get there. Therefore I continue to advise, don't chase highs for now!

 

Spring has come

The best season of the year in our area, Spring, has finally come. This year’s spring is especially welcome as we have gone through one of the worst winters in the North East. Cannot believe we were just hit by the worst snow storm a few weeks ago. The spring has not only brings the warmness, it has also makes our surroundings more colorful and beautiful. We literally live with natural paintings that are changing everyday now. Let me again brag first with a few photos from our bay view windows of both sides of our house here.

 

Even from the top glass panel of our front door, it is just like an oil painting of the Spring, isn’t? I enjoy the great colorful views every day from our house JJJ

 

Ok enough showings. What is also associated with the Spring season? If you live in a house with a yard, you must know an increasing gardening work is coming, regardless if you do it yourself or contract it out. Even without a yard, many people will love to plant flowers that is also largely started with Spring. That’s why I’d like to talk about an idea related to gardening. I’m sure anyone who has done some gardening work must know Scotts Miracle-Gro (SMG), a leading lawn and gardening company that has produced gardening products widely used in the US and in many other countries. If you have a lawn to maintain or love doing planting work, just check to see if you have bought Miracle-Gro products. I bet many of you do. That’s why when the spring comes, I cannot help but think about Scotts when I see the bags of fertilizer I have bought for our lawn that can also suppress weeds. Scotts has enjoyed many years of stable growth and its stock hit all time high at $110 late last year. But it crashed to $90ish due to missing the earnings expectations in Jan and again dropped to below $80 following the latest earnings report on May 1. In total it has been haircut by over 25% from its peak. In addition to the earnings weakness, Scotts' largest acquisition to date, $450 million for Sunlight Supply that is expected to close June 1 has also caused some concern on its increasing debt load. All in all, Scotts is in a downtrend at the moment. But if you know me as a contrarian investor, I like such kind of moments for those great companies in a temporary setback. I believe SMG is one of such stocks. On one hand, Scotts is still the leading company in the traditional gardening products, which has not changed at all due to the short term earnings weakness. More importantly, I think Scotts has made a great strategic move to get into a business that is still very controversial but has a great potential in my mind. That’s the marijuana business. This is the major motivation for Scotts to buy Sunlight as the manufacturer and distributor of hydroponics equipment will fill Scotts’ own Hawthorne's "missing piece" of supply chain management, which is strategically important to the cannabis business. I know many people will turn off immediately when they hear the word of marijuana. Indeed it is still illegal at the Federal level in the US but I think it is just a matter of time the day will come that marijuana will be legalized to some extent nation-wide in the US. It probably won’t take long actually. Don’t get me wrong, I’m not a promoter of the use of marijuana at all. But as a physician, I do well understand the significant medical effect of marijuana in severe pain management as well as its unique effect in some devastating illness without much treatment options like seizure and neurotic diseases. There have been extensive clinical studies done to verify its great medical values. Most of the states have already legalized marijuana’s medical uses. Regardless if you like it or not, this a megatrend that is prevailing not only within the US but also globally. Investing in SMG is one indirect way to ride the trend.
SMG was quite expensive at its peak but now with a 25% haircut, it is priced at a reasonable valuation with a PE of 17. When you invest in a stock for long term as a business owner, you need to pay attention to its Return on Equity (ROE). This is almost equivalent to the interest you can earn from your money in the bank, the higher the better. The SMG’s ROE is extremely high, a whooping 43%. This is one strong indicator of a great business that can return well to its investors. At this price, its dividend is also quite respectful at 2.6%. Although I wish it had a much longer dividend history, SMG has just started to pay dividend in 2005 at $0.25 per year. But it has increased its annual dividend most of years since then and it was increased to $2.06 last year. This amounts to an 8 times increase in the past 13 years, i.e. over 50% annualized increase of its dividend since it started to pay dividend. I cannot say its dividend is supper safe due to its short history but I would bet it will continue to hike its dividend in the future along with its booming business. I think SMG is a good buy now!

My wife’s “chicken hatching theory”

  Before I talk about the “theory”, let me first show you the long term chart for two stocks. Which one would you be more interested to buy? I’m sure you may think I’m too stupid even asking about this. Of course everyone will pick the one that has gained almost 600% over the 10 year period. Sure very logical and wise to go with this stock aiming for the maximal share price appreciation. I cannot blame you as I’d have made the same decision if I did not  know anything else in investing. But don’t be surprised that I’d actually pick the other one that has only gone up about 200% as I can show you, for long term investment, actually you can make much more money for a special type of stocks that are just staying low over time.

If you have followed me for some time, you really should not be surprised by my choice as I have talked about this idea several times here. But I know it is not a straightforward idea that many people can easily understand. That’s why I was surprised about my wife’s understanding about it and actually has come up with this easy to understand theory which I call as “Chicken Hatching Theory”.

Yes, no surprise to many of you, I’m talking about the dividend reinvestment strategy or DRIP. Let’s say you have a good stock, a mother chicken. One conventional way to make money from it is to grow the chicken as big as possible, i.e. the share price appreciation. Certainly no problem with this strategy, which can also make you a lot of money if you are right about the stock direction.  The problems for most people thought are the challenge to find such a supper growth stock at the right time and right price. You got to be perfectly right on its direction and can stay long with it even during volatile periods. And virtually for all the growth stocks, there is always a upper limit how much it can grow to over time. After all, no chicken can grow unlimitedly big. But if this chicken is good at laying eggs (dividends) that can be hatched to produce baby chickens and the baby chickens can grow and lay more eggs that can produce more chickens for more eggs and more chickens...., what will happen over time with this snowball effect? Well, you can end up with an unbelievably large amount of chickens that are all laying eggs for you to produce more chickens and eggs. As long as the mother chicken can continue to lay eggs, there is no limit how many more chickens you can have. The longer the cycle goes, the more chickens/eggs you will get. Eventually you will amass a wealth by this simple strategy that you can hardly imagine upfront. The best part? You don’t need the mother chicken to grow itself, i.e. even if your direction for the stock trend is bad and stock is not doing great for years, you actually can even make more money from this seemingly bad situation, as it can produce more chickens/eggs for you during the course. Got the idea? What a brilliant way to explain this complicated strategy, thanks to my dear wife. I love you, honey! And happy Mother's Day💞
    But let me be clear about this strategy: it is not a quick rich idea at all and actually it requires painfully long-term patience to stick to it regardless how the stock (the mother chicken) is doing. Another critical winning factor is that this stock must be good with a long term track record of increasing dividends (the eggs). The high the dividend growth rate, the better the long term gains! If you can find this kind of stocks, all you need to do is just to buy it at a reasonable price and set up an automatic DRIP and then you can simply forget about it. You won’t feel much in the early years while holding it but the magic will start to show after 15 years which will accelerate in an unbelievably fast pace thereafter. I know most people won’t have this kind of patience and for them they cannot even wait for 6 months to see the result, not to mention 15 years or longer. I’m certainly not against aiming for fast return within months or even weeks or days. That’s why I’m very active in trading. But for my long term investment, I’m extremely patient and only interested in such great dividend growing stocks and then let the DRIP do all the heave lifting work for me. It is really an effortless long term strategy. All I need is the patience that can turn a small amount of money into a life changing wealth. With that in mind, let me get back to the stocks I just showed above and prove mathematically the validity of the strategy.

The two stocks on the chart above are Home Depot (HD) and Lowes (LOW). No surprise, HD is doing much better in the past 10 years than LOW. Both companies are great dividend growers and for the 30 years history, they have increased their dividends by over 20% annually, an incredible strong dividend growth you can rarely find. So back to the question which one you would prefer for long term investment, assuming both have the similar valuation? I bet most of you would go with HD. No brainer, isn’t? But not for me actually. I’d go with LOW. Here is why. Let’s assume to invest $1000 for an annual dividend of $0.014 with a stock price as $1 per share (dividend yield 1.4%).  This was roughly the real data for LOW 30 years ago. Now let’s compare the following two scenarios:

Scenario 1: We invest this $1000 for 30 years with dividend reinvested. The dividend is growing annually at 20% (another real data). Let’s also assume the stock price is also increasing annually by 15%. This high share price growth is what most people would love to see, right? So how much money you can earn in 30 years with dividend reinvestment? An amazing $155K with an annualized return of 18%! Wow, a fantastic return for just a tiny $1000 initial investment without you doing anything else for 30 years! You cannot complain at all, right?

But I’m not happy at all! Let’s see how much better I can do with the 2^nd option. 

Scenario 2: I will keep everything exactly the same except one: invest this $1000 for 30 years with dividend reinvested. The dividend is growing annually at 20%. However, instead of looking for a high stock growth rate, I’d keep the stock price relatively low with an annual growth rate of only 5%, a sharp reduction from the above 15% growth rate. So how much I’d get after 30 years? Over $700K with an annualized return of 24%!! Can you believe that, a slower stock price growth can return 5 times more money?

That’s how the compounding magic can do for you with just a tiny amount of money! No wonder why Einstein called compounding as the World Eighth Wonder! The best part? You don’t need to chase for high growth of stock prices as it’s enormously difficult for most of people. The only thing you need to do is to find quality stock with a long track record of dividend growth and then simply buy when they are cheap and hold it forever with dividend reinvested. Everything will be automatically done without costing you anything else after you bought and set it up in your account. And you can forget about the stock price volatility as the lower prices it goes, the more you’ll gain at the end. This should be the ultimate investment realm: effortless and stress-less and Low Risk with High Return!!

Sell signal again?

       OMG! I didn’t expect to see this so soon as this is supposed to be rare but it just occurs again within a couple of weeks after none popping up in two years. See below and tell me what you can see?

    If you cannot tell what it is, then you are not a good “student” of TA I’m afraid😏😏 Please read this recent blog again to see what you need to see and know what’sis coming. Just a couple of weeks ago when this occurred, S&P dropped about 100 points. Will it do so again? Only time can tell but one thing I’m almost sure about is that some sort of selling pressure is coming with increasing volatility in the days ahead. Be prepared!
I know this can be confusing that I seem to keep changing my mind lately and as if I was talking both sides of the coin at the same time to ensure I was always right, up or down. Of course not! As you know, since a few weeks ago I have been talking bullish for the market trend for the next few months. I’m still bullish as such and the market is clearly beavering so by breaking out its months long downtrend this week. It gives me more confidence to keep my bullish tone, which I don’t expect to change soon. However, in terms of day to day moving, unfortunately, the market is not so nice to us to just keep in one direction and the herd mood is also keeping changing up or down. Therefore you are seeing more changes of my mood as well here for the short-term but usually in the opposite direction from the herd’s as you should understand now. I will try my best to minimize the confusion by spelling out clearly the timeframe I’m talking about and you please also just pay close attention to this important context as well.

For now, I’m bearish for the next week. That’s why I notified my friend before today’s opening to watch for the downside risk even though the market opened high today. No surprise to me to see the reversal within the day although I was expecting a total reversal. In any case, I’m expecting more downside next week! It could be just a brief and shallow 1% quick drop or it could be as severe as last time with 100 points tank. We will see when it happens. But I don't expect a long lasting correction as of now. The overall trend is still upwards moving forward. This is to just kill those overly euphoric herd who are chasing highs without knowing the risks involved. Hope you become much smarter by following my blogs💃😎🙋

Too stupid, guys!

A 4% drop as a reaction to the largest retailer Walmart’s (WMT) $16 billion buyout for a 77% stake of the Indian e-commerce giant, Flipkart. Usually the market reaction to any big buyout tends to be negative for the buyer as it costs money but from time to time, it could be viewed as very positive if there is a great business synergy with a bright future. I think Walmart this move is indeed very brilliant and should be very positive for its long-term future. Think about it, Indian is the 2^nd largest population with booming online business ongoing. Catching this huge e-commerce market now is similar to getting into the Chinese online retailing business 10 years ago I think. The potential is enormous. Actually, I saw some report that Amazon was also interested in this deal and actually it offered even $2 billion more than Walmart. Nevertheless, the funder of Flipkart accepted the lower offer from Walmart with a rumor saying that he did not like Jeff Bezos (Amazon funder) due to some personal dislike. Apparently, Amazon saw the same bright future as Walmart. Now think about it, how the market would react if Amazon got the deal? I’m pretty sure it would be a great reaction as if nowadays anything done by Amazon is great and anything done by others should be scoffed at. Too stupid, folks, if you are selling Walmart now!

I know it is stupid to argue with the Market, as it is supposed to be always right. But let me be crazy once this time to argue with the Market God now with a bold prediction: in a few months from now, I think Walmart has more upside potential than Amazon. I even think Amazon may face a high risk of going down from the current level in the weeks ahead. I believe anyone selling or even shorting Walmart now will be regretting very soon.

Tesla's saga is unfolding

Tesla reported better than expected earnings  last week but its stock tanked closely to 10%. People always try to find some reasons for a stock to move and they thought this big crash of Tesla was due to Musk’s arrogant humiliation to some analysts’ sharp questions on its profitability and ability to meet the production target that has been promised so many times but always failed to meet. I don’t care what are the real reasons behind its tanking but I’m just happy to see it got decimated! As you know, following its initial hard selloff a few weeks ago, I was expecting it to do a dead cat bounce towards $290. Well it did better than that and had actually went over $300 a bit. That was a great setup for a short for Tesla which was what I did, aiming to target its next downside point around $260. Tesla has not disappointed me so far.

To help you understand why Tesla is so much in a dire situation, just see a few facts below that have made Tesla fundamentally in trouble:

• Tesla has been burning over $3 billion per year so far and it currently has $2.7 billion in hand. That’s has made bond investors really nervous about its ability to meet its financial obligations without refinancing. But Musk seems to be very comfortable with their financial strength and has laughed at those doubters about their debt concerns. He openly said there was no need for Tesla to seek new debt or issue new shares. Really? Good luck anyone believing Musk on this!
• As I said, Tesla’s current business model will make it lose more by selling more. Here is the latest stat on this: right now, Tesla has a $22,584 pre-tax loss per vehicle. Without a miracle of dramatically scaling up its production, can you expect Tesla can ever make any money? Sounds like a joke to me!
• Here is the promise Musk has repeated made about their productivity target: 5,000 Model 3s per week by the end of June. What are they doing now? 2,270 Model 3s per week in the last week of April. So in less than 2 months, Tesla will need to more than double their productivity. Didn’t sound like a promise that can be met but investors in the past seemed just happy to believe whatever Musk had promised. Maybe not this time!

Regardless how much you love Tesla and Musk, its foreseeable future looks dire and is heading down!!

An extended challenging period is likely for semiconductors

I was lucky with my Micron (MU) trade since I have been wrong about its short term direction. When MU was chased up to its all time high around $60, I knew it was too hyped and vulnerable to a sharp correction. I made this call right as it indeed crashed towards $50 as I expected following its earnings report. But I thought it might have done this correction at $50 and should resume its next leg up from there. I indeed added my long position a few weeks ago by selling puts. Luckily I was right for a very short term when MU bounced back for a while that allowed my puts expired worthless. Then to my surprise, MU got crashed again and is now trading around $45. Now the big question is whether MU is a good buy now. While I’m still bullish for it for long term, I’m afraid MU will likely still struggle after such a bearish price action lately. Actually looking at the whole semiconductor sector now, the picture is not pretty at all. Below is the weekly chart for semiconductor (SMH). It has broken down from the bearish H&S pattern as I’m writing. The neckline is around $100. Technically it often declines the same amount from the neckline to its peak, roughly a $15 distance in this H&S. In other words, it won’t be out of norm to see SMH to drop towards $85ish before this correction is complete for the whole semiconductor sector. This may likely take several weeks at least with a lot of volatility in between. When the whole sector is doing poorly, I doubt any individual stocks will fare well without some exceptionally good news. For MU, it will at least struggle along with the whole sector for a while and there is a good chance it may even drop towards low $40s before the whole correction is done. People often got confused about the price actions in response to earnings. I know some friends were chasing highs for MU before the earnings and got excited about it even after its initial fall following the earnings because they thought MU’s earnings was fantastic and superb and it would go high soon. No doubt it was a good earnings report.  But general investors often fail to understand that the market is an efficient forward looking animal. When a high expectation is priced into a stock, it can crash regardless how great its earnings is if it cannot meet the high priced-in expectations. That’s what we are seeing for MU. Apparently even $50 is too high for the market now. That’s why chasing highs is never a good idea and often dangerous. If you are itchy to buy MU, better to wait till the dust settles. So far, MU is a falling knife that can hurt you badly if you are too early!

No fear of fears

I posted a blog here entitled “Are fears out there?” last year when the stock market was hot and strong. There was a widespread complacency and euphoria in the market with extreme low volatility. I think the volatility index, VIX has repeatedly hit historically lows, probably more than 30 times last year. I don’t think it has ever done this before, suggesting no fear whatsoever among investors. That was the time I really got feared about the market, hence the blog (see here). Then late February following the initial shocking crash, the market mounted a very strong rebound that made all the talking heads very euphoric and calling for new highs on the way. That was the time there was again no fear when I got concerned. Therefore I posted another blog here calling "Fear of no fear". But now, we are seeing just the exact opposite sentiment as I’m writing: there is widespread fear in the market and the overall sentiment is extremely depressing to say the least. How do I know? For one thing, VIX has stayed elevated since Feb, a good indicator how nervous the herd investors are. There is another good contrarian indicator: the end of world headlines prevailing in major presses. See what we have seen in the past few weeks:

• CNNMoney “Stop the market! I want to get off! Volatility is back” (April 16)
• The Wall Street Journal  “It’s a Scary Time to Be Trading Wall Street's Fear Index.” (April 22)
• USA Today “How to Get Over Your Fear of the Stock Market.” (April 25)

Pretty scary, isn’t, when all the major headlines are talking about how risky the market is? This is the time I start to see rosy pictures in the months ahead, i.e. don’t be fearful when there is a lot of fear! I think we are very close to the end of this correction phase already lasting for 3 months. I’m convinced we will see new highs in the months ahead this year. Don’t be fooled by the media headlines which are always scaring people at the wrong time and driving you into a wrong direction. Another big scary news will certainly be related to the trade war with China that the headline news has been overwhelmingly pessimistic, trying to convince you that such a trade war is inevitable. Don’t believe it! I stick to my gun that there will be no trade war with China, period!!

But again, don’t take my words as if I was suggesting there wouldn’t be severe declines moving forward. Not at all. As I have said many times, there won’t be a straight line up or down to this matter and we may still see sharp selloffs on the way up. This passing week was a great example how the market could have jerk reactions to the scary headlines. Just don’t be fooled by it and paralyze yourself. Good days are coming and ahead of us!


For the moment, the market is just directionless. Today's rebound seems very strong and powerful but actually it is simply consolidating within a very clearly defined range under all the scary headline noises bombarded around. The market is again doing what it is doing the best: to fool as many people as possible before its decisive move. This is typically a bottoming process and pretty soon it will work its way out to break out to the upside. This is how I’m positioning myself and I suggest you too!

A flash crash is coming?

The market is very nervous and has broken down from its seemingly bullish technical setup that could have otherwise pushed it up a lot higher. Tomorrow is the big day for the job report. I get a sense that the market may be trying to find an excuse to do the final cleaning work by flushing out those final herd of weak hands before completing the 3 month long correction. If so, a strong negative reaction to the job report tomorrow can do the trick. If indeed materialized, S&P could tank all the way down towards the ultimate low of this correction at 2530.




No guarantee of course as it is a 50/50 call but don't be surprised if that happens. I'm just thinking loud here as the short-term chart for S&P looks quite bearish for the moment. My wishful thinking is to see a panic reaction and a hard selloff tomorrow to shake out all the weak hands 😅😅