Article/Sina Financial Opinion Leader (WeChat official account kopleader) columnist Berry Research
As the US economy enters recession, when the market starts to decline, you should sell your positions.
After a 10-year bull market in the United States, American investors are afraid. They are afraid of buying stocks at high prices and of the collapse of the stock market. However, the biggest and most explosive rise in this bull market may not come yet. This is what investors call "financial growth" - the final sprint of the bull market. At this stage, leading companies began to take off, driving the whole market up significantly.
However, financial growth does not necessarily lead to the general rise of stocks. The last time the stock market in the United States rose was during the technology bubble in the late 1990s, when most stocks did not rise significantly. The same may happen this time.
The figure below shows the last 12 months of the bull market in the 1990s. As you can see, the stock movements of traditional companies (Dow Jones Industrial Average) are no longer in sync with those of technology companies (Nasdaq Composite Index).
In the last 12 months, the Dow Jones index basically remained unchanged, while technology stocks soared by three digits.
The beginning of this excellent performance indicates that financial expansion is in progress, and now this situation is happening again.
From the end of 2016 to the beginning of 2018, the stock trend of traditional companies was almost the same as that of technology stocks.
But in April 2018, the situation changed. In April 2018, the rise of technology stocks began to crush the component stocks of the Dow Jones Index.
In this process, the NASDAQ index reached a new historical high, which was exactly what happened in the late 1990s. Therefore, financial inflation is officially underway, and the final stage of this bull market may be staged in the next 12 to 18 months.
So now is a good time to hold American stocks, but which stocks should be held?
Buying the winner of the last financial increase
Last time, the NASDAQ market soared three digits in the last 12 months of financial growth. At that time, the NASDAQ index was mainly composed of technology companies, so this happened last time. These technology companies also happen to be very outstanding enterprises. "New Economy" companies are in the competition of "winner takes all". We already know who is the winner.
The easiest way to invest in these large technology companies is to buy exchange traded funds ("ETFs") that hold a large number of technology shares. Such funds hold shares of many dominant companies and can quickly diversify their investments. The following is the largest Technology Select Sector SPDR Fund (XLK) and the proportion of its four major technology shares:
XLK holds a large number of four major technology stocks, accounting for 44.9%. Today, the stocks of large technology companies are also the most important stocks in the S&P 500 index, and their market capitalization is more than $400 billion. Take a look at the valuation and growth data of the four major technology companies in these funds.
Facebook's growth is simply amazing, with average annual sales growth of 55% since 2009. Other technology companies cannot achieve Facebook like growth, but they are still excellent companies. These companies trade at a reasonable valuation, but have not yet reached the "financial inflation" valuation.
Therefore, this is one way to use financial inflation, but by using the same company, there is another way to increase potential income. You can buy technology stocks through ProShares Ultra Technology Fund (ROM), but use double leverage. If financial growth has arrived, these technology stocks should perform well, and this fund should perform even better. However, it should be noted that leverage not only enlarges the upside space, but also enlarges the downside risk.
As the US economy enters recession, when the market starts to decline, you should sell your positions.
(The author of this article introduces that an investment research institution with a history of 20 years provides the most cutting-edge analysis report for US equity investors.)
