Average Down? Not a Chance

 

Date: 5/31/2022
Author: Chris Hood

 


Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.


As many of you know, I don’t just trade options.

I also accumulate shares of stock in companies in solid companies that I believe aren’t going away. Top investors such as Warren Buffet have made their fortunes doing this.

They put in the time to analyze companies with strong “economic moats.

Let me define this term for those who haven’t heard it before. Moats were built to surround castles. Filled with water, they helped protect the fortress from siege engines and armies who wanted to storm it.

In investing, a strong moat means that a company is stable and well-protected from its competitors.

A business that’s unlikely to fail in the foreseeable future.

Companies like AMZN, GOOGL, and MSFT aren’t likely to collapse. So I feel comfortable holding for the long term.

Some of you reading this probably also hold these shares.

After reading some recent financial analysis pieces, I’m troubled by the idea they promote about averaging down by buying these stocks right now.

These articles urge investors to buy now while these companies are “undervalued.”

I take issue with this, especially if you’re considering buying anything for your investment portfolio. So I wanted to give you a few thoughts on why.


 


First and foremost, the whole idea of an undervalued stock makes little sense.

Stock shares are worth what people will pay for them…period.

Regardless of fundamentalist metrics such as the P/E ratio, a company’s share price contains all the information you need to know.

Valuations mean nothing compared to the charts.

Second, all investors must recognize that when the market falls, it drags down nearly every company. Tickers that closely follow the market are considered “high beta” equities.

Despite any economic moats they might have, they will take a beating during corrections or bear markets.

Market pullbacks are especially brutal to high beta stocks.

Finally, in light of this, I would urge caution when looking to get in at “rock bottom prices.”

To do so implies you know what those prices are.

It suggests you have the foresight to pick a bottom. I wrote about not too long ago.

Picking a bottom is a fools game – don’t try it.

Sure we had a recent rally that has everyone excited, but looking at the long-term trend on the monthly charts, I don’t believe this is the reversal everyone is hoping for.

A glance at the charts clearly shows a bullish momentum shift on the daily chart. However, we are still in a downtrend for long-term investing.

It typically takes 6-8 candles to reverse a trend on a chart.

And while we’ve seen that on shorter time frames, including the daily. However, it hasn’t translated to the weekly or monthly charts.

The monthly chart is most appropriate when you’re picking up shares to buy and hold.

I could be wrong, but I think we will see more downside before things get better.

Remember, even if you aren’t buying SPY shares, a significant drop in the market will batter most of your holdings.

We’re still below the daily 200 moving average, so institutional funds aren’t buying. That should tell you something. When they get in, the tickers start moving up, which I’m waiting for.

Keep in mind that this is my personal analysis. Ultimately, it’s your money and your responsibility. If your analysis is different, invest as you see fit.

Remember, the market will do what the market is going to do.

If you pick a bottom and make more money than me, I’ll cheer you on. But 20+ years in the market have taught me to be conservative and follow my signals.

And that’s just what I’ll do.

Cheers,
Chris Hood

PS – If you want more info on stock trading to go along with your options, remember that AlphaHunters comes with access to my live weekly webinars. I’m an interactive type guy and you can literally ask me anything you have questions about. Click here to find out more.


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