The stock market is expensive!
If you are a dividend growth investors and you think a little like Warren Buffett or Lowell Miller, you might think that most stocks are sold at premium right now.
Lowell highly suggests that we should buy dividend growth stocks when the initial yield is at least 1,5 times the market yield to respect his formula :
HIGH QUALITY + HIGH INITIAL YIELD + HIGH YIELD GROWTH = HIGH TOTAL RETURN
This formula makes sense to me. But, since the S&P500 yield is approximately at 2,4% right now, this would mean that you shouldn’t buy any stock with an initial yield of less than 3,6%… Good luck!! Most high quality stocks or wide moat stocks don’t offer such a yield right now.
But, technical analysis… Oh my god… I said it… I know, most “techniques” found in that field are just crap and non-sense and if your goal is to predict the future with a mix of all those techniques, you might as well flip a coin and you’ll probably get better results… But… And I really say but… There is good stuff in that field too and I had success using some of the techniques of this vast domain. So I try to keep my mind open. Serious studies by serious university researchers have been made and computer softwares have been designed to trade the market based on strategies borrowed from technical analysis. Flash traders are using technical analysis to get in and out of stocks at the speed of light and make tons of money.
As a statistician of crime (which is one of my study field – criminology, crime prevention and research), I have learned something very important. If you want to understand what is happening, who’s making it happen and why it’s happening, follow the money. Money tells everything…
The problem with the stock market is that it involves too many people at the same time, too many events at the same time and trying to figure out what the future will look like is like trying to predict what will be the weather on may 29th 2048…
But still, I believe that the market is trendy. Why? Because if you look at charts over long periods, you can see trends. No one who’s serious enough can deny it. There are bull markets, trading ranges and bear markets. There are short trends, medium trends, very long trends and even intra-day trends… There are resistance and support lines that can be drawn on charts and prices are trading within these limits often during long periods of time… We can all see those things on price charts…
There are also cycles! And, we currently are at the end of a cycle… It is called the “sell in may and go away” effect! Will the price drop again like it did in the past? Let’s look at past charts and decide by yourself!
I, myself, believe that waiting 30 days before buying anything is not a bad idea considering the current valuation of stocks on my watch list.
Based on Wikipedia :
Sell in May and go away is an investment strategy for stocks. It includes a theory (sometimes known as the Halloween indicator) that the period from November to April inclusive has significantly stronger growth on average than the other months. In such strategies, stocks are sold at the start of May and the proceeds held in cash (e.g. a money market fund); stocks are bought again in the autumn, typically around Halloween. It is the belief that it’s better to avoid holding stock during the summer period.
Though this seasonality is often mentioned informally, it has largely been ignored in academic circles (perhaps being assumed to be a mere superstition). Nonetheless analysis by Bouman and Jacobsen (2002) shows that the effect has indeed occurred in 36 out of 37 countries examined, and since the 17th century (1694) in the United Kingdom; it is strongest in Europe. While the effect may reflect a failure of the efficient-market hypothesis, alternatives exist such as small sample size or time variation in expected stock market returns.
I think it well describes the effect. But, I wouldn’t sell my stocks since I’m a long-term dividend investor. What I can do though is wait before buying stocks. During summer time, the market is usually more volatile and dips or at least opportunities to buy at better valuation often present themselves. Then, around november or december, there usually is a Christmas rush… and then, the january effect which will be the theme of another post!
Lets look at charts of the Dow Jones industrial from the last 5 years and see if the may effect has happened.
In 2009, we can identify a down trend starting around mid-june until mid July. This would have been a nice opportunity to buy! It was not a big one though…
In 2010, the down trend started earlier… Look at what happened in may and look at summer time. It was very volatile, but then around september-october, the market started trending up again… Summer time was a great opportunity to buy stocks again, even better then in 2009!
In 2011, the market started to trend down at the beginning of may. June would have been a good month to buy, but again, summer time was very volatile and clearly august and september were nice months to buy.
The picture is quite clear in 2012… Look at the nice downward trend in may! June, July and August were interesting entry points for a dividend growth investors seeking high quality companies listed in the Dow index.
Again in may… a small down trend and then a volatile trading range between june and november with several nice entry points… It was not a big one, but the market dipped a 1000 points between may and mid-june… not bad!
Here’s the 2014 chart so far… Will summer be though again? The market has been testing all time highs a couple of times recently… will it dip during summer?
You can yell out loud that you hate technical analysis, that it’s just crap but look at these charts… don’t you see any trends at all? For sure, it’s never the same, intensity changes also every year and timming is not very precise but summer time is usually not the best time for capital gain… is it?
It’s, in my opinion, a good time to fill the tank with great stocks purchased at better prices!
I hope it will happen again in 2014. I still hold 8000$ in cash to invest. But no stock on my watch list have crossed the threshold at which I would be okay to buy them…
Do you have any “tricks” like that to share? Are you waiting for a dip to buy dividend growth stocks or do you prefer cost-averaging your purchases and not pay attention to the market?
[author] [author_image timthumb=’on’]http://quityourdayjob101.com/wp-content/uploads/2014/03/ID-10050051.jpg[/author_image] [author_info]Hi, my name is Allan. I’m the masked blogger. Like you I’m a modern slave, prisoner of a 9@5 job in Corporate America. They told us when we were young that we would live in a society of leisure and that technology would permit us to work only a couple of hours per day. But we live in a society of stress and uncertainty. My situation could be a lot worse and I know it. So many humans are suffering on this planet. But a golden cage remains a cage anyway. At least, I have an escape plan. I will retire before 45 years old over my passive income. This is a dream that is so powerful that I will make sure it happens. To build my wealth, I mainly invest in undervalued dividend growth stocks. [/author_info] [/author]
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