There is no perfect crystal ball except we know that the smart money is sidelines on the markets. Make no bones about it, the US market is as expensive as it ever gets and the only reason why it has been climbing a wall of worries and disregarding fundamentals is because of cheap money and TINA (there is no alternative). It is usually when the markets let their guards down, that is when the trouble starts- VIX is at an all time low in recent months.
There are various categories of players in this market
1. A technical trader - day trader or short term trader- couldn't care too much about fundamentals (company, economy) as it is all about being disciplined on the charts and usually being the stocks with momentum and that are flavour of the month.
2. Confused market participant - who usually trades and follow discipline but becomes an investor falling in love with the stock
3. Buy and Hold Investor
a) Buy and Hold of traditional strong blue chip mom and pop type stocks (banks, Telstra etc) - usually for dividends and never sells
b) Buy and Hold of cyclical type stocks (e.g advertising, airline, building materials, housing, banks, vehicles)
c) Buy and Hold of micro&smallcap stocks with great IP that are non-cyclical (non economy dependent) and structurally robust , with proven business traction and revenue growth and globally scalable business model with near term or already achieved EBITDA positive prospect
d) Buy and Hold of micro&smallcap stocks that have no (or lacking) business traction and/or having substantial cashflow deficits that need regularly to be financed and supported by constant CR and/or participating in a competitive and crowded field with relatively low barriers to entry and/or having a poor commercial/revenue model and/or having high levels of debt or all of the above
If and when the Big Kahuna arrives, all market participants above will be adversely impacted but to different degrees and proportionate to their level of exposure. The degree of burn depends on Exposure, Allocation and Specific Stocks.
1. A disciplined technical trader can do very well as long as he/she remains discipline, able to control natural emotional responses to greed & fear and avoid becoming the confused trader in (2). But there are far and few amongst us. That said, being totally technical focus without having a clue on business and economic fundamentals at play, can't save you from being involved in the next debacle stock (like ISX) or blindsided by a sudden market downturn.
2. The confused trader is one that is undecided between trading and investing and most of us have been in this category before. We respond to what suits us based on the circumstance at hand. So there are times we should not have sold a great stock (that has gone multiple times higher after selling) but we did so for short term returns and then there are times we should have sold a dud stock (that goes bad after buying it as it is proven not to be a good investment) but did not because we lulled ourselves to think we should think longer term and be an investor and not willing to cut loss (and it worsens thereafter).
3a. These people are not HC people- they buy for dividends and never ever sell. And they buy yesteryear blue chip stocks which long term fundamentals have been disrupted (those that cannot grow the top line and have to reduce costs to grow profits e.g TLS and increasingly banks) , the dividends they buy would be coming down and does not compensate for eventual capital loss when the big bear takes us to a prolong market hibernation (as Hussman predicts, a suboptimal long term return).
3b. Get out of cyclicals now - the businesses of these companies are the first to be hit. Remember Qantas during the GFC? Qantas has done so well since but this same company was hand in glove for a bailout from the Government during the GFC period. And advertising companies or those relying on advertising are showing strain now, see Nine's results today.
3c. These are the ones IMO we should stay with long term and forms the basis of my selected Opportunity Stocks. The focus is not so much on meeting earnings guidance but consistent display of business traction, adoption, market expansion and continued adoption by prominent customers - they are no longer proof of concept stocks, they have a robust IP and business model and all needed is great execution and expansion, the rest follows. And on top of that, their business is structurally robust non-cyclical and more capable of withstanding the next economic downturn. That said, a modest exposure to these stocks over time could yield significant returns and because they are still relatively speculative, you don't need to be excessively exposed to it either.
3d. This class is the one that should be avoided at all times (even without a recession) and unfortunately have attracted a lot of speculative money for the latest hot stock in town that eventually prove to be nothing but hype and false promises , and sadly also ridden by a number who plough all their hard earned money for the much believed one stock wonder that would lead the path to riches.
