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Time to average down

April 9, 2020

Since stock markets peaked in or around 19 February there has been a full blown stock market crash and a partial recovery. I don’t know what is going to happen next but I can tell you my best guess, which is in line with what I have been saying since the crash began but now with a little more certainty.

No 1: the US is in a long-running bull market led by technology shares.
No 2: a black swan event in the form of the coronavirus, Covid-19, has delivered a dramatic shock to the global economy.
No 3: this will pass.

The basis for number three is partly that pandemics always do pass but more particularly that in the case of Covid-19 social distancing is working. Unlike, early generations, which suffered millions of deaths from pandemics, we know what causes them and how to react. We don’t have a perfect solution in the form of effective treatments and vaccines as yet but we know how it passes between individuals, so we know that we can beat it by social distancing and lockdowns. If we stay away from each other the virus cannot spread.

That’s the theory, which is being put to the test across the globe in a massive practical experiment and there are growing signs that it is working. We don’t yet know what the economic impact is going to be. It will obviously be severe in the short term. However I don’t think words like recession or depression are relevant. This is about a generally healthy world economy, with especial buoyancy in the US, which has been temporarily stopped in its tracks by a totally out of left field and non-economic set of events.

We have all been scared stiff not least at the risk of catching a virus that can turn nasty with older people but it is increasingly obvious that the worse case expectations are not going to happen. Expectations for deaths in the US have already been scaled down dramatically and this is likely to happen elsewhere, including in the UK. Incredibly, a year or two from now, this may all look like a blip. OK, hardly a blip if it killed you but whereas 50m to 100m died in the 2018 flu pandemic, we are not yet in six figures for Covid-19 and over one million deaths is looking much less likely.

In stock market terms this suggests that the lasting stock market effect of Covid-19 is going to be the creation of a great and possibly fleeting buying opportunity.

ETFs don’t go bust, partly because the indices they track are always being rebalanced around successful companies, which is why in the long run most indices head higher. One reason why is that they are continually being refreshed with exciting new companies – lots of IPOs. Europe doesn’t have the same entrepreneurial culture. If I ask you to name 10 great US technology companies you would do that with ease. Now think of 10 great European technology companies; that’s much harder! As a result the ETFs in the QV for ETFs portfolio are heavily weighted for US stock markets and technology shares. I don’t see that changing.

Because they don’t go bust ETFs are ideal candidates for averaging down. When shares in individual companies fall they may never recover. This is unlikely to happen with ETFs, making them good candidates for a stock market strategy known as averaging down. You buy more at regular intervals, on lower prices or on new chart buy signals.

I think now is a good moment to average down on the ETFs in the QV for ETFs portfolio. There was an ever better moment before the latest recovery and that is when I was recommending buying into the more heavily leveraged ETFs. Now I think it is a reasonable time to average down on everything. All the ETFs in the portfolio are still well below their peak levels and I expect all or most of them to regain and exceed those peaks over time.

If I am wrong, the pandemic is not coming under control and there is another down leg in the stock market that will be tough but it will also be an incredible opportunity for another round of averaging down purchases.

I normally look at monthly candlestick charts and use monthly moving averages. These are all still falling because the crash happened so fast. In order to find buy signals I have looked at weekly moving averages. In every case the shorter of the two moving averages has turned higher. This is my reason for arguing that now is a timely moment to average down because we do have buy signals across the board, albeit not as strong as the signals from monthly charts.

Below is a list of ETFs in the QV for ETfs portfolio with latest prices and all-time peaks.

Ark Innovation ARKK Buy @ $46.96 All-time high: $60.73
WisdomTree Nasdaq 100 3x QQQ3 Buy @ $1180 All-time high: $2578.17
WisdomTree FTSE 250 2x 2MCL Buy @ 14,000 All-time high: 27,385
WisdomTree S&P 500 3x 3USL Buy @ $432 All-time high: $1026.61
Direxion Daily Financial Bull 3x FAS Buy @ $31.22 All-time high: $108.13
Direxion Semiconductor 3x SOXL Buy @ $117.86 All-time high: $331
SPDR Dow Jones Industrials DIA Buy @ $238.92 All-time high: $295.87
ETFMG Video Game Technology GAMR Buy @ $44.11 All-time high: $48.36
ETFMG Cyber Security HACK Buy @ $37.35 All-time high: $45.10
First Trust Cloud Computing SKYY Buy @ $56.47 All-time high: $68.94
Global X FinTech FINX Buy @ $26 All-time high: $34.45
Global X Millennials MILN Buy @ $21.66 All-time high: $28.02
Automation & Robotics RBOT Buy @ $6.96 All-time high: $9.00
Edge MSCI World Momentum IWMO Buy @ $40.90 All-time high: $49.52
FTSE 250 UCITS MIDD Buy @ 1549.8 All-time high: 2107.2
iShares Expanded Technology IGM Buy @ $225.57 All-time high: $271.09
iShares Expanded Tech Software IGV Buy @ $221.16 All-time high: $267.70
iShares Russell 200 Growth IWY Buy @ $89.73 All-time high: $106.30
iShares Russell 3000 IWV Buy @ $160.88 All-time high: $198.55
iShares S&P 500 IUSA Buy @ $25.415 All-time high: $31.36
iShares US Medical devices IHI Buy @ $243.12 All-time high: $278.19
Montenaro European Smaller Co’s MTE Buy @ 966p All-time high: 1204p
DWA Technology Momentum PTF Buy @ $69.4 All-time high: $88.90
Dynamic Software PSJ Buy @ $89.83 All-time high: $107.40
Nasdaq Internet PNQI Buy @ $132.16 All-time high: $157.84
Invesco QQQ (Nasdaq 100) QQQ Buy @ $201.43 All-time high: $237.47
Philadelphia Semiconductor SOXX Buy @ $224.21 All-time high: $269.36
Invesco S&P Small Cap Mom. XSMO Buy @ $31.27 All-time high: $43.65
S&P 600 Small Cap Healthcare PSCH Buy @ $108.65 All-time high: $138.32
S&P Health Care Equipment XHE Buy @ $75.77 All-time high: $90.39
S&P 600 Small Cap Growth SLYG Buy @ $49.65 All-time high: $66.92
Templeton Emerging Markets TEM Buy @ 701p All-time high: 877p

I decided to recommend them all because they are all giving buy signals and it follows the logic of ETFs as ideal for averaging down/ regular buying strategies so that general market weakness becomes an asset, not a threat. The leveraged ETFs are more for gamblers but can deliver amazing results and often do move between 10 and 20pc on the day!

If somebody told you that global economic activity was going to slow dramatically for several months and then pick up to carry on as normal or even beat normal because of the spring-loading effect, what would you do? I don’t think you would want to sell for such an obviously temporary setback and if prices fell sharply you might well want to buy. Well, that’s what I think is happening with Covid-19. In the middle of a strong bull market driven by globalisation and an accelerating technological revolution we have had a massive temporary interruption that came out of nowhere but surely will not last. Common sense suggests that it is a buying opportunity.

This is what I wrote with the preceding QV for ETFs alert. In QV for Shares I wrote something similar and made some recommendations on the very day the market hit bottom (in fact the market was right on its absolute low with the Dow Jones index down 1,000 points as I was writing though it subsequently recovered to end the day higher) and came close to that point in QV for ETFs with recommendations for QQQ and QQQ3, ETFs that track the Nasdaq 100.

Now I am repeating myself but with more clarity on the success of the Covid-19 containment strategy plus across the board buy signals (albeit minor ones) for all the ETFs in the portfolio. There is a case for saying everything is a buy; that probably applies to other ETFs you hold. There may well be lasting effects from the virus and behaviours may change permanently in some areas of activity but that is not necessarily bad news. My guess is that technology shares will benefit in a world readier to work from home and keener to stop destroying the planet by excessive travelling, whether in planes or fossil fuel cars.

As I say above, if I am wrong and both pandemic and economy spiral out of control then there may be a second downward leg and another averaging down buying opportunity. Buffett is good on this. He says whenever prospects look grim he remembers the resilience and energy of the American people (he is a patriotic sort of guy) and that encourages him to buy into the fear, sure that recovery is only a matter of time.

In Europe, they are going to have to take a close look at what the EU is for as Italy explodes in frustration. Apart from freedom of movement I struggle to see any benefits from saddling Euroland with an expensive bureaucracy. You would have thought Covid-19 was the perfect opportunity for a co-ordinated response; if so it was completely missed.

Politicians love the EU because it gives them jobs, huge expense accounts, fancy titles, a sense of mission and a chance to make endless new rules for us – the little people who can’t be trusted to take their own decisions. We are going to be so much better off without it.

The main reason why I am alerting on all these ETFs is because I expect these prices to look good once the bull market resumes in earnest. I don’t know when that is going to happen but I am sure it will given the accelerating pace of technological advance. I also expect globalisation to continue although the way it happens may be affected by the pandemic scare.

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