It Takes Good Tools to Be Contrary
It was the worst of times.
The first six weeks of 2016 were the worst start to a trading year… ever.
Both the Dow Jones Industrial Average and S&P 500 Index had their worst five-day starts to a trading year in history in January 2016.
The Dow fell 6.2% from January 4 through January 8. The S&P 500 slid 6%. And the Nasdaq Composite Index was down 7.3%.
We did see a “relief rally” in late January, but U.S. stocks resumed their steep descent in February.
And they didn’t bottom until February 11.
All told, the Dow shed 10.1%, the S&P 500 shed 10.5%, and the Nasdaq shed 14.8%.
It was the best of times.
From February 11 through March 31, the Dow shot up 11.1%, the S&P 500 shot up 11.2%, and the Nasdaq shot up 13.7%.
The Dow (+1.5%) and the S&P (+0.8%) ended the first quarter of 2016 in the green. The Nasdaq’s sharp rally out of winter and into spring pulled it up to a loss of 2.7%.
So what were you doing on February 11?
Were you panicking?
Or were you running down your “buy list,” looking for opportunities to establish positions in high-quality companies at rock-bottom prices?
Are you a victim?
Or are you a contrarian?
That’s a Big Question, one that gets to the heart of your entire approach to the market.
Here today to help us sort (some of) it out – and to equip us with the tools to help us make informed decisions about technology investments – is Wall Street Daily’s Chief Technology Analyst Lou Basenese.
How to Be a “Contrarian”
Lou kicks off today’s Saturday Spotlight by recalling a pithy dichotomy about the market from one of his early mentors:
“There are only two types of investors: contrarians and victims.”
Contrarians “are those that find undervalued securities or new technologies early on, position themselves to profit, and do so – handsomely – because they were early.”
Victims are the investors “that figure it out way too late… and as a result they end up nursing heavy losses.”
Lou identifies two tools that, when it comes to technology investing, will help us be the contrarian more often than we’re the victim.
First things first: As Lou notes, tech adoption is “absolutely, 100% predictable.”
Like me, you’re probably skeptical of that last statement.
So Lou has a history lesson for us, documenting the efforts of Joseph Schumpeter (“creative destruction”), Everett Rogers (the S-curve of innovation adoption), Paul Saffo (“macro-myopia”), and Geoffrey Moore (the chasm between early and mainstream adoption).
He brings us up to 1995, “the seminal year,” when we were introduced to Gartner’s Hype Cycle.
Gartner discerned a meaningful pattern through observation of technology adoption across multiple sectors and industries. This pattern includes five phases.
It explains how technologies are introduced to the market, how they mature, and how expectations evolve.
It’s proven over time to have significant predictive capability.
The key, according to Lou, is that the phases of Gartner’s Hype Cycle aren’t just descriptive. They’re prescriptive too.
Here’s why Gartner’s Hype Cycle is Tool #1: If you monitor hype cycles for emerging technologies, you can understand when you should time your investments.
You’ll want to stay tuned for the real-world example of Tool #1 at work, as Lou traces the evolution of 3-D printing technology, starting in 2006 (during the patent phase) and plowing into 2013 (the “peak of inflated expectations”).
Because you’ll want to know how these phases translate into investment decisions. And Lou provides some context with a look at the stock chart of 3D Systems Corp. (DDD).
(It’s important to note that Lou was recommending 3D way back in 2010 in Digital Fortunes – well before the share price spiked on “inflated expectations.”)
So let’s talk about Tool #2.
Gartner’s Hype Cycle is released just once a year. So it provides only a look at a moment in time.
What we need is a real-time gauge. And Lou has one for us – it’s pretty simple. It’s literally right at your fingertips.
It’s “Google Trends” (www.google.com/trends/), which details web and news searches for anything you care to inquire about.
For our purposes, we can get a snapshot depicting the “interest over time” for technologies such as 3-D printing.
We can gain insights into what “the informed” are talking about based on “news” searches. And we can also understand what “the masses” are interested in via “web” searches.
If “the masses” are searching in significant numbers for a particular new technology, “You can bet your bottom dollar that we’re near a peak of inflated expectations.”
Google Trends allows you to track searches during particular time ranges as well. And you can compare search trends for one technology versus another.
(Note: “Virtual reality” is generating a lot of search traffic…)
It’s a pretty useful tool.
And anyone can use it.
The Real World
Lou closes with a pretty cool real-world illustration of how a particular stock’s trading pattern will mirror Gartner’s Hype Cycle.
Back during the dot-com craze everybody was sure Amazon.com Inc. (AMZN) would dominate the retail space. That was 1999. And the stock price reflected these expectations.
Amazon stock crashed along with everything else dot-com-related in 2000.
But Amazon – 15 years later – remains a dominant force in retail.
Timing is everything – and Gartner’s Hype Cycle and Google Trends analysis will help you separate “good” timing from “bad” timing.
And if you really want to profit from technology stocks, avail yourself of the unmatched “primary due diligence” that informs Lou’s research for Digital Fortunes.
Spend a few more minutes with Wall Street Daily Chief Technology Analyst Lou Basenese, as he knocks down the myth of the “death of the smartphone boom.”
He also clues us in on the best ways to play that continuing trend right now.
“If we dig into the data,” Lou writes, “there’s one sub-sector of this industry that I’ve highlighted before where growth is accelerating, not decelerating.
“As such, it remains a prime investment opportunity.”
Senior Analyst Greg Miller extends the technology thread with an update on virtual reality (VR).
Turns out, there’s a lot to be learned about and through the use of VR.
“Now, when most people think about virtual reality, what probably springs to mind are video games – futuristic, animated fantasy worlds where people get to play a super-soldier or some other character,” notes Greg.
“But ‘virtual’ reality can also transport people from one place to another – for example, from the classroom to a museum.
“And this is where the technology has the ability to transform the education sector.”
Chief Income Analyst Alan Gula uses President Barack Obama’s recent visit to Cuba as a jumping-off point for a discussion of the ins and outs of investing in closed-end funds (CEFs).
First, you have to know what you’re buying – those who piled into a particular “Cuba” CEF seemed unaware that it had “little direct exposure to” the island nation.
Second, it always comes down to supply and demand. That’s what drives economies… and net asset values for CEFs.
“CEFs tend to be relatively small and illiquid,” notes Alan, “so their holders are predominantly individual investors. As a result, CEF share prices are heavily influenced by the herding of retail investors…”
Senior Correspondent Shelley Goldberg studies next steps available to monetary policymakers the world over.
“Unfortunately,” Shelley concludes, “most of the fiscal and monetary policy options have been exhausted. The pressures of stagflation and deflation are growing, and the search for new solutions has run its course.”
Of course we want to know what happens next.
The last-resort option: helicopter money.
And Global Markets Analyst Martin Hutchinson, continuing his coverage of the 2016 presidential primaries, offers a forecast on how a “third” Clinton term would impact the economy.
Martin imagines “First Lady” Bill Clinton so you don’t have to.