Technology ETF: Investing Money

Picture of a fist punching through glass.

Technology ETF
(Investing Money)

H i friend! This blog post showcases five companies that on the leading edge of 5G wireless technology. With speeds 10 times faster than the current LTE (long-term evolution, or 4G) networks, 5G will transform Internet streaming and wireless communications.

For the rest of this opening monologue, please skip to here.

NBPlease note that some of the information in this blog dates back to the April-May timeframe of this year, but should still be of interest to you.

This post is a tad late in getting out to you, due to lots of other stuff going on in my private life.

Yes, believe it or not, I do have a life outside my business.

Screen shot of awards announcement.

Table of Contents:

The Power of 5G Wireless
The Goodness of VOL
Rising Interest Rates
The Odd Couple
Dividends Galore
Stay the Course
Market Mojo
More Runway for Stocks
Hang In There
Stocks Are Not Risky Now
Stocks ‘Trump’ Bonds
No Need to Panic
Party On!
Up, Up and Away
Inflation Smarts
M&A & Peak Market
Buffett’s Take on Buybacks
The Truth About Buybacks
The VIX Crystal Ball
Bond Yields and Banks
Boo on Top $ Managers
BOO on Real Estate
Renting ‘Trumps’ Owning
Boo on Bonds
Consumer Staples Stocks
Stock Market Valuations
Cheap or Value Trap?
Time Cycles
The SKEW Index
TradingSmarts Alert
Momentum Stocks
Bull Market Defined
Secular Versus Cyclical
Value Investing
Quant Funds
S&P TSX ‘Trumps’ S&P 500
Momentum Investing
Containing Treasury Yields
S&P 500 Wow Factor
S&P 500 Defined
Bull Market Start Date
Blackstone Rocks
Medical Devices
Biotech and Pharma
Diagnostic Healthcare
Bond Market Size
Salesforce Wavers
Kudos
References
Legal Notice
Conclusion

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Opening Monologue Continued

Your cell probably registers as ‘4G LTE.’

That’s what most phones read as these days.

Coming soon… your phone will say ‘5G’ there instead.

A tiny change, you say? 

Hardly… it ushers in one of the greatest technological shifts of our lifetime – one that will create the transfer of immense wealth over the next few years.

Now, you can sit back, and miss out on this revolution in the works, or you can take action, and invest in companies that are participating in this explosive phenomenon.

This isn’t a fad… it is a huge trend that you don’t want to miss.

The 5G technology afforded visitors to Pyeongchang Olympic venues a glimpse into the future, as tiny cameras on athletes streamed footage in real time.

Widespread deployment of the 5G technology will take time and billions of dollars.

Several North American companies have already emerged as being on the forefront of 5G AT&T Inc., BCE Inc., Telus Corp., and Verizon Communications Inc.

They are already investing billions in fibre-optic networks to prepare for 5G.

As a matter of fact, AT&T (T) and Verizon (VZ) are rolling out 5G in select cities by the end of 2018.

Networking giant Cisco Systems Inc. (CSCO), Fibre-optic leader Corning Inc. (GLW), and dominant chip maker Intel (INTC) are on the leading edge of providing the technology to link up and control 5G traffic.

(Info via Scott Clayton, as reported in The Globe and Mail, 23 February 2018 and Jason Stutman, Editor, Technology and Opportunity)

The following stocks are rated ‘moderate buy’ by TipRanks:  CSCO, GLW, and VZ – INTC and T a hold.

I reported on Cisco here:

https://www.tradingsmarts.com/how-to-invest-to-make-money/

And here:

https://www.tradingsmarts.com/return-on-investment/

Cisco’s Quarterly Earnings History (courtesy Nasdaq.com):

Screen shot of earnings for Cisco.

Sixty-one ETFs have Cisco Systems Inc within its Top 15 holdings.

XLK Technology Select Sector SPDR, United States, NYSE (courtesy ETF.com):

Screen shot of XLK performance.

All returns over one year are annualized.

All returns are total returns unless otherwise stated.

Technology ETF XLK Composition (courtesy ETF.com):

XLK offers a fairly broad exposure to the U.S. technology segment, but its S&P 500-only portfolio tilts away from ETF.com’s segment benchmark.

XLK comprises all the big names normally associated with technology, but also a few that may seem out of place, such as financial payment processers or telecom firms.

Its limited-selection scope does not include small-caps and most mid-caps.

Avoiding less-stable, smaller firms ensures lower volatility and results in a slant towards value compared to EFT.com’s broad tech-industry benchmark index; it can cause other minor performance differences.

XLK is one of the cheapest and largest funds in its segment and by far the most liquid active traders take note.

And, for many investors, XLK is the go-to choice in the segment.

Expense Ratio:  0.13 percent

Courtesy ETF.com:

Screen shot of XLK makeup.

Notice CSCO (Cisco) as part of the makeup of the XLK ETF above, courtesy ETF.com.

Technology ETF XLK Price Chart (courtesy ETF.com):

Screen shot of XLK chart.

Analyst Estimates for CSCO (Courtesy MarketWatch.com):

Screen shot of Cisco analyst calls.

TipRanks Rating on CSCO:  Strong Buy

Investors alike are continuously on the prowl trying to figure out where to invest money to get good returns.

Well, look no further than the technology ETF XLK.

How 5G will change your life – see The Globe and Mail Report on Business article link in the references section towards the end of this blog post.

For other investing ideas, go to

https://www.tradingsmarts.com/how-to-invest-money-to-make-money/

The Goodness of VOL

Rising volatility will lead to a healthier market.

Everyone will no longer be on the same side of every trade, taking the same bet that an individual index or stock will go down or up.

That should result in better ‘price discovery,’ which is a fancier way of denoting greater differentiation in the values between bad and good stocks.

According to David Kotok, head of Cumberland Advisors, the reality is that rising volatility, as measured by the CBOE Volatility Index (or VIX) is only a reflection of volatile movements in the market – not a predictor of future returns.

He points out that, whenever the VIX has doubled in a period of three months, the S&P 500 has gained an average of 6.31 percent in the following six months.

Since 1990, the S&P 500’s average six-month return is 4.37 percent.

(Info via Robert Burgess/Bloomberg News, as reported in The Globe and Mail, 17 April 2018)

Rising Interest Rates

Rising interest rates could boost the appeal of bonds, and reduce corporate profits by increasing borrowing costs.

(Info via Ian McGugan, as reported in The Globe and Mail, 9 May 2018)

The Odd Couple

Neither valour (Musk) nor value (Buffett) has been a winning strategy of late.

The two men are polar opposites, but they have one thing in common – they share the same ability to frustrate investors.

Berkshire and Tesla have produced nearly identical returns over the past three years, despite their completely different profiles.

So much for all the hype about value investing.

Tesla is anything but a value proposition, but it sure is giving Berkshire a run for its money.

(Info via Ian McGugan, as reported in The Globe and Mail, 9 May 2018)

Dividends Galore

Six years ago, Apple paid no dividend at all.

Now, it pays more dividends than any other company – and the amount keeps growing.

May 1st, it raised it quarterly payout by 16 percent to 73 U.S. cents per share, eclipsing second-place Exxon Mobil.

Apple stock is also surging, which hit a record after strong second-quarter results and news that Warren Buffett’s Berkshire Hathaway recently increased its take in the company.

(Info via John Heinzl, as reported in The Globe and Mail, 9 May 2018)

Stay the Course

Buffett recommends that investors stay the course with simple stock index funds – more specifically, buying an index fund like the S&P 500 fund over time (think VOO – Vanguard S&P 500 ETF NYSE).

Of course, there’s also the opportunity of buying a technology ETF like XLK.

Buffett doesn’t think the stock market is overpriced, compared with other options.

The reports he gets from from Berkshire’s more than 90 businesses indicate to him that the economy remains strong, and has been improving lately.

According to Buffett, most of Berkshire’s businesses are hiring, and several of them are having trouble finding workers – carpet installers and certain construction workers being especially hard to find.

So far this year, Berkshire has bought 75 million additional Apple shares to give it more than 240 million shares.

Buffett really likes the economics of Apple’s business and its management.

He decided to invest in Apple once he realized that consumers are unlikely to switch to another product.

(Info via Josh Funk, The Associated Press, as reported in the Times Colonist, May 2018)

Buffett has been buying stocks since March 11, 1942.

He knows what to buy, not necessarily when.

He has bought stocks no matter who was President.

Apple makes its products indispensable, says he.  He has bought a little more of the stock lately.

He likes airlines, but stays below 10 percent.

He likes Jay Powell, Fed Chairman.

(Info via Buffett interview, CNBC, 30 August 2018)

Market Mojo

The market has legs…

  1. The market is up 29 percent since the election;
  2. The Dow Jones crossed the 20,000 mark for the first time in history;
  3. The Federal Reserve is raising interest rates – an action that many investors see as a ringing endorsement of the strength of the U.S. economy;
  4. Trump claims to have saved thousands of jobs by publicly shaming massive companies like Carrier and Ford for opening factories in Mexico;
  5. Wall Street investors are abandoning bonds, and piling into stocks;
  6. The value of the U.S. dollar hit a 14-year high, surging to its highest level since 2002.

Translation:  Could it just be that we are on the verge of a market melt-up unlike anything we’ve seen in a recent memory.

(Info via David Hanson, Investment Analyst, as reported by The Motley Fool)

More Runway for Stocks

Based on one measure, the investment pros recently hit their most bearish level for stocks since early 2016.

The fact that the pros are worried is a good thing… it basically tells us that stocks have more room to grow.

One measure showed that investment managers are at their most bearish since 2016… the National Association of Active Investment Managers (NAAIM).

The NAAIM Exposure Index is a weekly survey of hedge-fund and mutual-fund managers.

It asks what percentage of managers’ portfolios is in stocks.

This survey showed that investment managers were record bullish in December.

But, the NAAIM Exposure Index fell to its lowest level since early 2016.

There’s been a major decline in sentiment from investment managers in recent months… they moved from fully invested to just 50 percent in stocks in March.

March’s low reading showed investment pros were the most pessimistic since February 2016.

The investment pros are clearly spooked… volatility is back, we had our first correction in years in February, stocks fell, they have been jumping up and down like kangaroos since then, and the investment pros pulled out of the market.

But, March’s fall in optimism suggests we haven’t seen the top in stocks yet.

We’ll all know it’s a top when the investment pros are excited to see the market swoon.

You should be in a buying mood when they unanimously view a decline as a good thing.

It’s important to note that the long-term trend is still up.

Until that changes, the smart bet is to take the recent fall – and the fear from investment pros – as a buying opportunity.

Stay long my friend.

(Info via Brett Eversole, as originally published at DailyWealth, 25 April 2018)

Hang In There

According to Peter Berezin, chief global strategist at Montreal-based BCA Research, “Unless you think a recession is around the corner, you should overweight stocks.  It’s as simple as that.”

He goes on to say, that is “the most useful lesson I have learned over the past 25 years studying macro (economics) and markets.”

The balance of economic indicators suggests that the dark side of the business cycle is still far enough off into the future that a healthy exposure to stocks is warranted, again according to Mr. Berezin.

He said, “Equities typically do well in the second-to-last year of business-cycle expansions.  We are probably in that window now.”

Since the late 1940s, there have been 11 U.S. recessions, almost all of them closely coinciding with bear markets in U.S. stocks.

But, the bulk of the pain for investors, at least, is inflicted in advance.

According to BCA data, the six months prior to those recessions resulted in an average annualized loss of 7.8 percent in the S&P 500.

It’s been nearly a decade since the previous recession.

According to Mr. Berezin, “Another recession is not around the corner.”

Interest rates are still accommodative, even though they are rising, while fiscal policy is still stimulative, particularly in the U.S.

It will likely not be until 2020 that rising interest rates will bring about the next recession – so says Mr. Berezin.

The general consensus appears to be that the immediate risk of a recession is low.

The latest Merrill Lynch global fund managers’ survey, which canvassed the views of about 200 instititutional-, mutual-, and hedge-fund managers, shows that just 13 percent of respondents believe a recession is likely within the next year.

In sum, the economic outlook still looks supportive.

In the absence of a recession on the horizon, any market weakness should be viewed as a great buying opportunity.

(Info via Tim Shufelt, as reported in The Globe and Mail, 19 April 2018)

Stocks Are Not Risky Now

“We are in one of those periods where stocks are not risky, and where bonds are very risky,” according to Abe Sheikh, Cougar Global’s co-chief investment officer and a JP Morgan alumnus.

Cougar only invests in ETFs, because of the diversity and low fees such securities provide.

(Info via Barry Critchley, as reported in the Financial Post, 21 April 2018)

Stocks ‘Trump’ Bonds

“I see a runway of at least 18 to 24 months, where stocks outperform bonds.”  (Stan Wong, director and portfolio manager at Scotia Wealth Management)

His top sector weightings are 38 percent financials, 18 percent technology, 17 percent consumer discretionary, and 14 percent health care.

(Info via Brenda Bouw, as reported in The Globe and Mail, 30 April 2018)

Buffett says stocks are always more attractive than bonds.

Sure beats three percent for 30 years (bond paper).

(Info via Buffett interview, CNBC, 30 August 2018)

No Need to Panic

Investors are holding on to their broadly benign view of the world:  solid corporate profit growth, strong and steady economic growth, low inflation, and higher but well telegraphed U.S. interest rates.

(Info via Jamie McGeever, London, as reported in The Globe and Mail, 9 August 2018)

Party On!

In BMO Capital Markets’ 2018 Outlook, Brian Belski, their chief investment strategist, the proponent of a 20-year U.S. bull market, outlined the three stages of secular bull markets:  reaction, acceptance, and eurphoria.

According to him, nine years after the financial crisis, investors are finally abandoning reaction – wondering if the climb is for real – in favour of acceptance.

Should he be right, the bulls will keep running.                       

(Info via John Daly, as reported in Report on Business, May 2018)

Of course, there are various ways of participating in the U.S. market to enjoy the ride, including investing in VOO (Vanguard S&P 500 ETF NYSE) and technology ETF XLK.

Up, Up and Away

U.S. economic growth in the 2nd quarter gets revised higher; remains strongest since 2014.

(Info via BusinessInsider.com, Akin Oyedele, Senior Markets Reporter)

Inflation Smarts

The stage is set for higher inflation, and we may see higher inflation over the next three to five years – perhaps even longer.

Stocks and Inflation

In general, stocks are a better hedge against inflation than bonds.

The underlying businesses will experience rising costs like labour, but they can counteract by raising their prices in concert with inflation.

Furthermore, as more money chases rising prices, there is the ancillary effect of stock prices being pushed up.

In the short term, though, rising inflation raises the spectre of the Fed raising interest rates, which presents a challenge for stock prices to overcome.

But, history reveals that stocks can and do adjust quite nicely as interest rates rise.

Inflation fears can cause big down days for stocks but, in general, the stronger economy will propel stocks higher.

You can get a leg up by focusing on businesses with pricing power – the ability to raise prices – and low variable costs, such as labour costs.

Bonds and Inflation

In general, higher inflation drives bond prices down.

A bond investor gets a fixed stream of income that doesn’t rise.

If the income that investor receives in the future is worth less because of inflation, that represents a loss.

When expected inflation is higher, bond prices fall, which pushes their yields up until they offer a fair yield with the new inflation expectations built in.

So far, that has been happening in some bond markets, but not others.

Investing in a bond fund instead of individual bonds can protect an investor from these variances.

(Info via Dr. David Eifrig, DailyWealth.com, as reported at DailyTradeAlert.com, 28 April 2018)

M&A & Peak Market

In the U.S., the direction of regulations and taxes is now clearer than this time a year ago.

Plus, all of the typical economic drivers are present to make for a robust deal-making environment:

  1. Mounds of cash sitting on corporate balance sheets;
  2. Cheap debt;
  3. High stock valuations.

Merger activity tends to pick up when the market is overheated, and when chief executives are tempted to take advantage of rich valuations.

The pick-up in megadeals could signal we’re approaching a ‘peak’ market, and it is making stocks expensive.

Bear in mind, though, that asset prices can remain high for longer than many think, and the pick-up in M&A isn’t necessarily a harbinger of a market downturn.

(Info via John Reese, C.E.O. of Validea.com and Validea Capital Management, as reported in The Globe and Mail, 7 May 2018)

Buffett’s Take on Buybacks

Buffett likes Apple because of its ‘extremely sticky’ products to which consumers become attached.

He endorses management’s decision to buy back its own stock, citing it to be the most productive use of cash.

Berkshire is now Apple’s third-largest shareholder, behind Blackrock and Vanguard.

(Info via Trevor Hunnicutt and Jonathan Stempel, Reuters, as reported in The Globe and Mail, 7 May 2018)

The Truth About Buybacks

Buybacks are generally regarded as favourable to shareholders, but some critics hold that they are a lazy way of spending money, rather than investing it back into the business or buying another business.

Buybacks take shares out of the market, thereby reducing the share count, and possibly inflating earnings per share.

The S&P Buyback Index measures the performance of the 100 stocks with the highest buyback ratios in the S&P 500.

This year, it is up 5.8 percent, as compared with the S&P 500, which is up six percent.

(Info via John Reese, as reported in The Globe and Mail, 18 August 2018)

The VIX Crystal Ball

Whenever the VIX averages 50 percent or more from where it was the prior year, history tells us this is a sign of a weak, not a strong, stock market.

This year, we have seen three percent intraday swings in the Dow (as we experienced 24 April 2018) – nine so far, six down, three up.

In sum, there is ‘get out of jail free’ card when the Fed is raising rates and shrinking its balance sheet.

(Info via David Rosenberg, chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave, as reported in The Globe and Mail, 26 April 2018)

Bond Yields and Banks

Interest rates are on the rise – advantage:  banks.

Interest rates are set by the FOMC via its monetary policy, and reflect a number of factors.

They are designed to control inflation, and maintain healthy economic growth.

When the Fed wants to move rates higher, it sells its securities to banks, and subsequently removes funds from its balance sheet – giving banks fewer reserves, and thereby allowing them to raise rates.

When the Fed wants to move rates lower, the Fed purchases securities from its member banks, and deposits that credit onto the banks’ balance sheets.

Lowering rates is good news for the stock market, as it telegraphs a signal that the Fed is a accommodating, and wishing for more economic growth. 

Increasing rates conveys the opposite message – that the Fed has to slow growth, and contain inflation.

Most industries consider higher rates and loan costs as a negative – but not the banks.

With rising rates, the banks have more room between the rate that they borrow from and the rate that they present to their clients.

Short-term U.S. Treasury bond yields closely reflect the fall or rise of interest rates, and they also follow the movement of the U.S. Banks Index – DJUSBK (Dow Jones Banks, United States, NYSE); U.S. 5-year Treasury bonds yields move with the U.S. Banks Index. 

This is mostly due to a decrease or an increase in profits that short-term rates inflict on the profitability of most banks.

Due to the closeness of this relationship, investors in the banking sector can use the yields of the short-term five-year bonds, which tend to lead the banks, to gauge the trend of the banks. 

(Info via TechnicalSpeculator.com, 25 April 2018)

Boo on Top $ Managers

The top money managers in the world underperform three-five out of every 10 years, including the best of them all, Warren Buffett.

(Info via Tom Bradley, as reported in the Financial Post, 21 April 2018)

BOO on Real Estate

Homebuyers typically lost two percent of their investment every year, once returns were adjusted to reflect all factors, including the hefty costs of maintaining a residence – this according to the most recent Credit Suisse Global Investment Returns Yearbook, authored by Elroy Dimson, Paul Marsh, and Mike Staunton of the London Business School.

Their findings were based on data compiled on 23 countries since 1900.

Those professors are some of the most respected financial researchers in the world.

(Info via Ian McGugan, as reported in the May 2018 edition of Report on Business)

Renting ‘Trumps’ Owning

Renters can accumulate as large a nest egg as homeowners by focussing on saving and investing – this according to Kevin Langman, a fee-based financial planner based in Calgary.

When added up, renting can save thousands on interest, maintenance, mortgage payments, property taxes, and repairs – while freeing cash for other pursuits.

Mr. Langman suggests putting the difference between a mortgage payment and rent in a broadly diversified exchange-traded fund.

Andrea Thompson, a senior financial planner with Coleman Wealth of Raymond James in Toronto, suggests investing in blue chip equities that pay a rising dividend over time.

To keep it simple for novice investors, she adds, “Invest in shares of the very bank that you would have taken a mortgage from.  Buy their stock, and hang on as long as you can.  Ignore the day-to-day price variability.  Collect the dividends.”

She cites a recent calculation for a client comparing renting versus buying.

Renting eclipsed buying, increasing her client’s wealth by $114,000 over a twenty-year period.

The client had been considering a $335,000 condo, with a mortgage of $250,000 at 3.75 percent – versus renting at $1,250 a month.

Factored in were rent increases of two percent annually, the appreciation of the home at two percent, home insurance, maintenance, mortgage payments, and taxes.

(Info via Anna Sharratt, as reported in The Globe and Mail, 8 May 2018)

Boo on Bonds

According to the Institute of International Finance, investors have pulled more than US$5.5-billion from bond markets since mid-April.

(Info via Paul Wallace, Netty Ismail, Lilian Karunungan, Bloomberg News, as reported in The Globe and Mail, 8 May 2018)

Consumer Staples Stocks

One sector that has shown defensive and independent qualities toward economic cycles is consumer staples.

(Info via Noor Hussain, an account executive for  Inovestor Inc., as reported in The Globe and Mail, 8 May 2018)

Think XLP.

Stock Market Valuations

The mutual fund giant The Vanguard Group discovered that, during the period from 1926 through 2011, the best determinant of long-term future stock market returns is stock market valuations – not earnings expectations, economic growth, or interest rates.

Investors prospered handsomely when they bought during periods when stocks were inexpensive relative to book value, dividend yields, earnings, and sales.

They fared less well when they bought during periods when stocks were richly valued.

A study by Crestmont Research was even more conclusive.

It looked at rolling stock market returns between 1919 and 2017, and apportioned them to the best and worst deciles.

The worst 20-year periods averaged 5.2% annual returns, the best 15.4%.

That’s quite a variation, turning a $100,000 portfolio into either $280,000., or $1.75 million.

What could have generated the higher return?

The answer quite simply… by investing when starting valuations were on the cheap.

The opposite is quite true too… buying when valuations were high led to much-lower-than-average returns.

This should catch the attention of today’s buy-and-hold types.

After all, the S&P 500 is currently selling at 24 times trailing earnings, as at 15 April 2018).

That clocks in at 50 percent higher than its long-term average price-to-earnings of 16.

But, don’t sell your stocks.

History suggests that stocks regularly go from fairly valued to overvalued and from overvalued to crazily valued, before returning to undervalued.

There is nothing as disastrous as a rational investment policy in an irrational world, according to economist John Maynard Keynes.

To continue profiting, even as stocks get bid up to unsustainable levels, you can run trailing stops behind your individual stock positions.

Further, you can also rebalance your portfolios annually, selling those asset classes that have appreciated the most, and adding the proceeds to those that have lagged the most.

This both increases your returns, and reduces your risk.

It is unreasonable to expect that the performance of the S&P 500 over the past decade will be repeated in the decade ahead.

The Crestmont and Vanguard studies show that to be highly unlikely.

However, active investors can take advantage of the fact that there will always be individual stocks that outperform the market averages, and that certain sectors remain undervalued today.

For instance, U.S. value stocks are unusually inexpensive relative to growth stocks, international stocks are inexpensive relative to domestic stocks, and emerging market equities are the cheapest of all.

There you have it… yes you do have options, if you are at all concerned about present valuations.

(Info via Alexander Green, InvestmentU, as reported at DailyTradeAlert.com, 15 April 2018)

Cheap or Value Trap?

How to Tell If a Stock Is Cheap – or If It’s Just a Value Trap:

History has proven that, over the long term, buying cheap stocks gives you better returns than buying expensive stocks.

But, to get such returns, you have to be sure that ‘cheap’ is not perpetual.

If it is, you can’t expect to get those returns – perhaps none at all.

So, how to know if a stock is really cheap – or if it’s just a value trap?

Whether a stock is cheap or expensive depends on its valuation – not on the share price itself.

You can measure a stock’s valuation in a number of ways; here are two of the most popular methods to value a stock:

  1. Price-to-Earnings (P/E) ratio;
  2. Price-to-Book (P/BV) ratio.

Here, you are looking at the fundamentals of a company – things like how much debt they have, how much they earn, and how much they sell – and measuring them against the market price of the stock.

On closer inspection, a cheap-looking stock might not always live up to its valuation billing.

The ingredients of a value trap include deteriorating assets, a long track record of poor capital-allocation decisions, bad management, and product obsolescence.

One kind of value trap to watch for is an earnings-driven value trap.

This results from a stock appearing to be cheap because of a low P/E ratio (calculated as the price of the stock divided by the earnings per share).

But, the P/E ratio will climb, if earnings keep falling.

As an example, if a stock is trading at five dollars per share, and its earnings are 50 cents per share, it will have a P/E ratio of 10.

But, if the share price stays the same, and earnings drop to 35 cents per share, the P/E ratio would climb to more than 14 – a lot less cheap.

Investors tend to fall into this trap when a stock’s price falls slightly – it looks cheap.

But then earnings drop, and what was cheap is now less cheap – even though the stock price hasn’t moved up.

Then, earnings decline again, and what once looked cheap is now downright expensive, because earnings have fallen so much.

Now, a value trap can stop being a value trap – and become an attractive, undervalued investment – if something changes.

Things that can turn a value trap into a great investment:

  1. Higher commodity prices;
  2. New management;
  3. A big shift in the industry;
  4. Regulatory change.

So, how do you avoid value traps?

To begin with, don’t invest just because valuations seem low – they might have been low for a long time; don’t necessarily take valuation metrics at face value.

When you’re gauging a company’s true value, here are a few questions to ask yourself when you are gauging a company’s true value:

  1. How is the company’s debt profile? You want to avoid companies that are loaded with debt.
  2. Is revenue growing? A company that isn’t generating more in sales every year will have a difficult time earning more money every year.
  3. Is the industry or sector as a whole growing? If not, that’s another reason a company might have a difficult time increasing revenues and earnings.
  4. Does the company operate in a cyclical industry (like commodities, for example)? If so, you’ll need to time your purchase so that you don’t get sucked into a value trap.  If the company is in what’s called a ‘structural’ decline – which can happen after a fundamental shift in a business or industry – it can mean that demand for the business, and sometimes the industry, will never recover.

In short, cheap is usually good – but not always.

Value traps can punish your portfolio even more than buying a stock that’s too expensive in the first place.

(Info via Kim Iskyan, DailyWealth.com, as reported at DailyTradeAlert.com, 14 April 2018)

Time Cycles

If you’re buying a stock with the intention of holding it for years, fundamentals matter – but not so in the short term.

Let’s consider ‘time cycles,’ which comes from legendary trader W.D. Gann, a market theorist from the early 20th century.

He discovered that markets move in symmetrical cycles, which can help you call market tops and bottoms, if you understand them.

As an example, the stock market appears to arrive at an important turning point every nine years.

These dates bear witness to that fact:

1982: March of that year saw a short-term bottom in the Dow Jones Industrial Average that ultimately led to a double-digit rally… and eventually a meteoric rise that ended in March, 1991.

1991: After the spike ending in March, the Dow Jones traded sideways all year long.  In that case, the turning point was different – the market ran into a wall.

2000: The ‘dead money’ of 1991 presaged another huge rise – culminating in the peak of the tech-stock bubble in March, 2000.  From 1992 to the top, the Nasdaq 100 Index skyrocketed about 1,300 percent.

2009: Nine years after the dot-com peak, the market bottomed out during the Great Recession in March, 2009.

2018: Fast forward to 2018… over the past nine years up to present (2018), an historic bull market has unfolded.

It’s reasonable to assume that we are approaching an important inflection point – a major turning point in the market.

Historically speaking, it was logical to conclude that the month of March was going to be a volatile period for stocks.

Without fail, over a period of 10 trading days in March, the S&P 500 Index fell more than seven percent – a huge move for a major market index.

So, where to from here?

In September, the market formed an interesting pattern – one that has occurred before.

Over a 26-month period from March, 2009 to May, 2011, the Dow Jones Transportation Average more than doubled.

The last time there was a 26-month run like that, the market stalled out before continuing higher.

From an historical perspective, a similar correction was in the cards for the spring.

And, guess what… that’s exactly what happened – the markets tumbled 10 percent or more in early February.

Thanks to time cycles for that.

Beyond that, based on what happened in 2011, the recent correction could be seen as a powerful catalyst for another leg higher.

But, when will that rally start?

Looking back at the cycle top in 2011, the ensuing period of volatility lasted three to five months.

Were that to be the case this time around, that would put us at May.

Given the above scenario, it’s not a stretch to envision extraordinary trading opportunities in the next two to three years.

(Info via Greg Diamond, Daily Wealth, as reported at DailyTradeAlert.com, 19 April 2018)

The SKEW Index

The SKEW index gauges the cost of put options on the S&P 500 Index relative to calls.

It is currently signalling unease – near the highest since March, showing the strength of demand for ‘puts’ (options that offer the chance to sell an asset in the future for pre-agreed prices.)

(Info via Sujata Rao and Dhara Ranasinghe, London, as reported in The Globe and Mail, 17 August 2018)

The crash of October 1987 reminded investors of the potential for stock market crashes, and dramatically affected their view of S&P 500 returns.

Investors now appreciate that S&P 500 tail risk – the risk of outlier returns two or more standard deviations below the mean – is significantly greater than under a lognormal distribution.

The CBOE SKEW Index (‘SKEW’) is an index derived from the price of S&P 500 tail risk.

The price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options, as with VIX®.

SKEW typically ranges from 100 to 150.

A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and that the probability of outlier returns is therefore negligible.

As SKEW increases above 100, the left tail of the S&P 500 distribution is afforded more weight, with the probabilities of outlier returns becoming more significant.

One can surmise these probabilities from the value of SKEW.

Given that an increase in perceived tail risk increases the relative demand for low strike puts, increases in SKEW also correspond to an overall steepening of the curve of implied volatilities – known to option traders as the ‘skew.’

(Info via CBOE.com)

There are worrying signs of contagion, or more specifically investor hedging, as evidenced by the CBOE’s Wall Street ‘skew index.’

(Info via Barry Ritholtz, as reported in The Globe and Mail, 20 August 2018)

TradingSmarts Alert

Weaning markets off the easy money makes 2019 a dangerous year for financial assets.

(Info via Sujata Rao and Dhara Ranasinghe, London, as reported in The Globe and Mail, 17 August 2018)

Momentum Stocks

Investors following this strategy buy shares that have had the most robust price moves and profit growth.

(Info via John Reese, as reported in The Globe and Mail, 18 August 2018)

Bull Market Defined

A bull market is an extended period of time, usually lasting 10-20 years, that is driven by broad economic disruptions that create an environment conducive to increasing corporate revenue and earnings.

Its most dominant attribute is the increasing willingness on the part of investors to pay more and more for a dollar of earnings.

(Info via Barry Ritholtz, as reported in The Globe and Mail, 20 August 2018)

Secular Versus Cyclical

Bull and bear markets can be thought of as both longer-term secular moves (eight to 20 years) and the shorter cyclical rallies and sell-offs within.

Cyclical markets tend to track the business cycle.

(Info via Barry Ritholtz, as reported in The Globe and Mail, 20 August 2018)

Value Investing

The technical aspects of value investing entail screening for and valuing low price-to-earnings ratio (P/E) or price-to-book ratio (P/B) stocks.

(Info via George Athanassakos, as reported in The Globe and Mail, 8 August 2018)

Quant Funds

These funds scour every quantitative piece of information from company financial statements in an attempt to unearth factors that might allow them to beat the overall market.

(Info via Hugh Smith, as reported in The Globe and Mail, 8 August 2018)

S&P TSX ‘Trumps’ S&P 500

Over the entire 18-plus year period, January 2000 to May 2018, the S&P TSX beat out the S&P 500 by nearly one percent on an annualized basis (excludes currency moves).

(Info via Martin Pelletier, as reported in the Financial Post, 19 June 2018)

Momentum Investing

This style of investing works when practised vigorously and systematically.

Witness the fact that it has beaten the market over 211 years of U.S. stock market history, from 1801 to 2012, according to AQR Capital Management.

It has also performed well in 40 other countries and for more than a dozen types of assets other than stocks.

History shows that the two approaches – momentum and value – move in opposite directions.

(Info via Ian McGugan, as reported in Report on Business, July/August 2018)

Containing Treasury Yields

Given foreigners’ reticence to acquire fixed-rate government debt issues at auctions, the government would rely more on domestic banks, fund managers, and Wall Street dealers to buy its debt to keep Treasury yields from marching much higher this year.

(Info via Richard Leong, New York, as reported in The Globe and Mail, 23 August 2018)

S&P 500 Wow Factor

Analyst projections say S&P 500 profits will rise roughly 13 percent a year through 2020.

(Info via Elena Popina, as referenced in The Globe and Mail, 6 July 2018)

According to Thomson Reuters, S&P 500 company earnings are expected to rise 23.3 percent this year and another 10.1 percent in 2019.

(Info via Lewis Krauskoff, as reported in The Globe and Mail, 21 August 2018)

According to Thomson Reuters, companies in the S&P 500 are on track to report an astounding 24.8 percent profit growth in the second quarter, year-over-year.

Nearly 80 percent of companies have beaten analysts’ estimates, which is well above the average ‘beat’ rate of about 64 percent.

(Info via Bloomberg News and Reuters, as reported in The Globe and Mail, 22 August 2018)

At about 21 times profit, the S&P 500’s multiple is still about a third below levels seen in the dot-com era.

(Info via Lu Wang, as reported in The Globe and Mail, 8 August 2018)

S&P 500 Defined

The S&P 500, the Standard & Poor’s 500 Index, is a market-capitalization-weighted index of the 500 largest U.S. publicly-traded companies by market value.

One of the most common benchmarks for the broader U.S. equity markets, it is a market value or market-capitalization-weighted index.

Other common U.S. stock market benchmarks include the Russell 2000 Index, which represents the small-cap index, and the Dow Jones Industrial Average or Dow 30.

Because it represents the largest publicly-traded corporations in the U.S., the S&P 500 is one of the most widely-quoted American indexes.

The S&P 500 focuses on the U.S. market’s large-cap sector.

Company market capitalizations are adjusted by the number of shares available for public trading; hence, it is also a float-weighted index.

Given its depth and breadth, the S&P 500 is often the institutional investor’s preferred index.

Historically, the Dow Jones Industrial Average has been known as the retail investor’s gauge of the U.S. stock market.

Because it comprises more stocks across all sectors (500 versus the Dow’s 30 Industrials), the S&P 500 is viewed by institutional investors as being more representative of U.S. equity markets.

(Info via Investopedia)

Bull Market Start Date

Ned Davis Research uses data from the Dow Jones Industrial Average to define its cycles, because there is more historical data.

That investment research group defines the current bull market as starting February 11, 2016.

(Info via Lewis Krauskoff, as reported in The Globe and Mail, 21 August 2018)

Blackstone Rocks

The Blackstone Group L.P. is an American multinational private equity, alternative asset management and financial services firm.

Blackstone has become one of the world’s largest private equity investment firms.

As the largest alternative investment firm in the world, Blackstone specializes in private equity, credit and hedge fund investment strategies.

Blackstone’s private equity business has been one of the largest investors in leveraged buyouts in the last decade, while its real estate business has actively acquired commercial real estate.

Blackstone is headquartered New York City, with eight additional offices in the United States, as well as offices in London, Paris, Dublin, Düsseldorf, Sydney, Tokyo, Hong Kong, Singapore, Beijing, Shanghai, Madrid, Mumbai, and Dubai.

Blackstone stock (BX) is rated a buy by MarketWatch and TipRanks.

I reported on Blackstone here:

https://www.tradingsmarts.com/how-to-invest-money-to-make-money/

As at this writing, I own the stock.

Medical Devices

Boston Scientific Corporation (BSX) NYSE:

Rated overweight by MarketWatch.com and a strong buy by TipRanks.com.

Doing business as Boston Scientific, Boston Scientific Corporation is a manufacturer of medical devices used in interventional medical specialties, including interventional radiology, interventional cardiology, peripheral interventions, neuromodulation, neurovascular intervention, electrophysiology, cardiac surgery, vascular surgery, endoscopy, oncology, urology and gynecology.

Boston Scientific is primarily recognized for the development of a drug-eluting stent which is used to open clogged arteries, known as the Taxus Stent.

The company is also notable for its minimally invasive implantable cardioverter-defibrillator (ICD), the EMBLEM Subcutaneous Implantable Defibrillator (S-ICD); this arose with the full acquisition of Cameron Health in June 2012.

(Info via Wikipedia)

As at this writing, I own the stock.

Biotech and Pharma

IBB iShares Nasdaq Biotechnology ETF:

This hugely popular ETF tracks the performance of a market-cap-weighted index of biotechnology and pharmaceutical companies listed on the NASDAQ.

While most peer funds use alternative weighting schemes, this ETF tracks a market-cap-weighted index of NASDAQ-listed biotech companies.

IBB’s cap-weighting favours large-caps, and concentrates a basket with exposure to the top 10 names.

IBB also differs from some peer funds and ETF.com’s segment benchmark owing to its emphasis on pharmaceuticals.

The fund can only hold companies traded on the NASDAQ; accordingly, it may miss opportunities in companies traded on the NYSE, which are held by several of the other biotech funds.

This product is extremely large and liquid, and has a good history of tracking its underlying index, doing so at a cost towards the lower end of its segment.

(Info via ETF.com)

As at this writing, I own the technology ETF XLK, but sold IBB because it was under-performing.  That said, I will keep an eye on it for a possible re-entry.

Diagnostic Healthcare

Quidel Corporation (Nasdaq: QDEL) is a major American manufacturer of diagnostic healthcare products that are sold worldwide.

Rated a buy by MarketWatch and TipRanks.

(Info via Wikipedia)

As at this writing, I own the stock.

Salesforce Wavers

  • Salesforce (CRM) beat expectations for the quarter;
  • The contribution from MuleSoft was higher than expected;
  • Guidance for the fiscal third quarter was below expectations.

(Info via Jordan Novet, Technology Reporter for CNBC.com)

I did own this stock, but sold it based on the lower guidance.  That doesn’t mean I might not buy it again at some point, once price recovers.

Bond Market Size

Per Cramer, the bond market is much larger than the stock market.

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References

https://secure.angelpub.com/o/articles/167220

https://www.nasdaq.com/earnings/report/csco

http://etfdb.com/stock/CSCO/

http://www.etf.com/XLK#overview

https://www.marketwatch.com/investing/stock/csco/analystestimates

https://www.tipranks.com/ 

http://dailytradealert.com/2018/04/28/what-you-dont-know-about-inflation-could-cripple-your-portfolio/

http://www.thetradingreport.com/2018/04/25/heres-why-we-havent-seen-the-top-in-stocks/

http://dailytradealert.com/2018/04/15/historys-best-stock-market-indicator-is-flashing-red/

http://dailytradealert.com/2018/04/14/how-to-tell-if-a-stock-is-cheap-or-if-its-just-a-value-trap/

http://dailytradealert.com/2018/04/19/i-believe-well-see-extraordinary-trading-opportunities-in-the-next-2-3-years/

http://www.cboe.com/products/vix-index-volatility/volatility-indicators/skew

https://www.investopedia.com/terms/s/sp500.asp

https://www.theglobeandmail.com/report-on-business/how-5g-will-change-your-life/article38009527/

https://en.wikipedia.org/wiki/The_Blackstone_Group

https://en.wikipedia.org/wiki/Boston_Scientific

https://www.etf.com/IBB#overview

https://www.cnbc.com/2018/08/29/salesforce-earnings-q2-2019.html

https://www.businessinsider.com/us-gdp-q2-2018-second-estimate-2018-8

https://en.wikipedia.org/wiki/Quidel_Corporation

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Conclusion

I hope you found this Technology ETF: Investing Money blog post to be of interest to you, and that it has given you some insights into the 5G wireless opportunity, amongst other things.

If you have any questions, please don’t hesitate to give me a shout.

If one-on-one private coaching is of interest to you, you can get a hold of me here.

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If you’ve not yet gone through my previous blog posts, please take the time to do so when time permits: 

VIX

After Hours Trading

Trading Volume

Stock Trading Stops

Currency Trading Strategy

How to Pick Stocks

Stock Trading Rules

Three Winning Stock Trading Strategies

Forex Trading Techniques

Forex Pivot Points

MACD Divergence

ADR Indicator

Best Forex Indicator

The HNW Club

Q&A

Market Update

Margin and Leverage

Support and Resistance

Stock Market Forecast Next Five Years

Trading Forex News

SimpleFX Trading Tool

Stocks to Buy Today

Investment Strategies

Portfolio Investment

Return on Investment

How to Invest Money to Make Money

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Here’s To Your Success and Quality of Life,

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Peter R. Bain
PS:  Don’t let them steal your dreams!
PPS:  I will help you achieve your dreams!

About Peter R. Bain

Picture of Peter R. Bain, founder of www.TradingSmarts.com – the go-to site for all things trading.

Peter R. Bain

I am a speaker, trader, writer, aviator, car nut, Harley enthusiast but, above all else, I am here for you at TradingSmarts, which I founded some 15 years ago.

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