Author: Smart Investing

Stock market strategies

Hamish Hodder: Warren Buffett’s Alarming Stock Market Prediction

Posted on by Smart Investing

Stocks have delivered a fantastic year. The market has even bucked seasonal trends, trending higher in seasonally weak months. Year-to-date, the S&P 500 is up over 22%. That’s more than double its long-term average annual return.

However, with markets near all-time highs, it pays to take a closer look at valuations. Historically, the S&P 500 has traded between 15 and 20 times earnings. For the past 15 years, stocks have been on the higher end of that trend.

Today, the S&P 500 trades closer to 30 times earnings. That’s one of its most expensive valuations on record. While higher growth from AI could help bring that ratio down over time, it could be a sign of caution.

That may also be why value investor Warren Buffett has been raising cash. Buffett has reduced his stake in Bank of America (BAC), down under the 10% reporting threshold.

He also sits on a record level of cash. That cash is currently earning a relatively high rate of interest, over 4%, invested in short-term Treasuries.

Buffett has cited a potential change in tax rates as a reason to sell. Tax cuts passed by Donald Trump during his first term are on track to expire at the end of 2025.

However, with markets at all-time highs, investors looking bullish, and pricey valuations, Buffett could just be taking some cash off the table. Investors with some big tech wins may want to scale back as well.

 

To view the full reason for Buffett’s move to cash, click here.

Economy

Elliott Wave Options: Forecasting an Election Correction? Wave 5 Top?

Posted on by Smart Investing

The stock market has bucked seasonal trends. While September and October are historically the two weakest months for stocks, stocks trended higher. And while the market’s volatility index has ticked higher to 20, it’s done so without a selloff.

This break from the historic norms isn’t unusual. Markets can often be unpredictable. And historic trends are never 100% certain. Traders need to be nimble for such trend breaks.

Going forward, however, markets may continue to buck the trend. That could mean a post-election pullback. Stocks typically rally after the uncertainty of an election period has passed.

Yet on a technical basis, markets are overbought. And markets took a breather after a six-week rally higher. With key earnings underway, there will be significant daily volatility. But it may not mean stocks continue to trend to new all-time highs for a few more weeks.

Using Elliott Wave theory, markets could be reaching a Wave 5 extension. That could push the S&P 500 to 6,000. But from there, investors may face a correction that lasts for a few weeks.

Even with a correction, markets remain on track for a strong year. Traders may want to take off leveraged positions before the election. And use any market pullback to buy back into the market.

 

To view the full video, click here.

Cryptocurrencies

Rajat Soni: European Central Bank Analysts Think Bitcoiners Will Massive Benefit From Price Appreciation

Posted on by Smart Investing

Bitcoin has appreciated about 60% year-to-date. Amazingly, bitcoin’s returns have beaten out gold and the stock market. Yet there could be even more upside ahead.

For starters, bitcoin remains well off its highs in the spring. The issuance of 11 bitcoin ETFs made the asset easy for investors to own. Prices then backed off. But bitcoin’s halving in the spring means less new crypto is being mined.

These factors point to continued demand and limited supply. The European Central Bank expects bitcoin prices to continue to increase over time. Those who invest in bitcoin now can benefit from that trend. Those who continue to stay in fiat currency will lose purchasing power to bitcoin over time.

Meanwhile, early bitcoin investors have already seen large price appreciation in the 15 years of bitcoin’s existence. With the last bitcoin to be mined in 2140, it remains in its early stage.

Originally, bitcoin was created as a form of digital money meant for online transactions. However, in a fiat system, bitcoin has best functioned as a savings mechanism.

Its total maximum supply makes it ideal for savings. And that’s why the price has appreciated significantly relative to fiat currencies.

Bitcoin also creates a free market for money, relative to the money created at will by central banks. Central banks have a propensity to weaken their currencies over time. Bitcoin offers an escape from that policy.

 

To view the full analysis, click here.

Stock market strategies

A Wealth of Common Sense: Factor Investing With Dimensional Fund Advisors

Posted on by Smart Investing

Investors generally lump investment opportunities into either value or growth. Unfortunately, that approach remains far from comprehensive. A great growth stock can also have value elements, and vice versa.

When investors look at different factors that make up great companies, they can find a mix of value and growth. And the right factors can mean creating a portfolio that fares exceptionally well. Factor investing doesn’t quite fit any particular box, but it can mean big profits and great returns.

For instance, a systematic approach may include looking for companies that have great management. That can include both growth and value.

A great CEO at a slow-growth company like a railroad may look at increasing profitability and margins.

But a software CEO may look at new product opportunities for fast growth. Either way, the value that leadership adds is critical.

Investors can even use the concept of factor investing passively. This means finding funds that have a history of outperformance but also low turnover and a low cost.

Mixing several of these funds with a mix of growth and value can lead to a set-and-forget portfolio. Such a basket full of funds with the right factors could easily outperform the market.

While the market may always trade-off between growth and value, investors don’t have to. Mixing the best of both can lead to improved returns.

 

To view the full interview, click here.

Income investing

Tastylive: Example of a Short Naked Put

Posted on by Smart Investing

Investors have plenty of ways to use options trades. Most investors use options for a directional bet. Why? If a stock moves higher, a call option can soar. Traders put up far less capital than buying a stock, and see bigger percentage gains.

However, there’s a flip side to options trading. Traders can sell options instead of buy. Doing so can create income. Often, it’s better income than can be earned from simply buying shares of a stock and collecting dividends.

Many investors use covered calls to generate income on top of a stock position. But investors can also sell naked put options. This puts investors on the hook to buy shares of a company if they fall to the strike price of the option.

This strategy can be risky, and may involve holding substantial cash. But it can offer attractive income opportunities.

With a naked put strategy, traders should wait until a stock has fallen and become oversold. A stock that’s fallen heavily should have seen a big jump in put premium.

If the stock rebounds, the put option can decline in value quickly. That allows investors who sold the put to buy back at a lower price, pocketing the difference as profits. If shares languish, it may take more time for the option to play out.

 

To look at an example of a naked put trade in action, click here.

Commodities

Lead-Lag Report: Chris Vermeulen on Market Timing, ETF Strategies, and Navigating Economic Downturns

Posted on by Smart Investing

After rallying for six straight weeks, stocks look overextended. They’re ready to take a break. That could mean a minor market downturn. Going into next year, there’s a higher chance for a 10% pullback or more.

This kind of downturn can hurt investors who simply buy and hold. Or who only trade assets they expect to go up. However, for investors willing to employ hedge trades, a market downturn can help boost total returns.

For instance, right now the stock market is soaring higher. But, technical indicators warn of a slowdown. One such sign is the relative strength index. When the market moves too far at once, the reading can become overbought.

While that may not mean a big pullback, it could mean several days of the market trading weakly. For bullish traders, that slowdown in momentum can make trading a challenge. But for investors with hedge trades, it can mean an opportunity to profit from another corner of the market.

Gold has also performed strongly. The metal has topped $2,700 per ounce, and has outperformed the S&P 500 index this year.

But even gold can show signs of a slowdown and has some pullbacks along the way. Understanding how far gold is likely to pull back can create a buying zone. Investors and traders who buy at those zones can create an even bigger profit when gold rallies again.

 

To view the full interview, click here.

Stock market strategies

Swordfish Trading: Leveraged ETFs and Dollar-Cost Averaging In the Long-Term

Posted on by Smart Investing

Investors often turn to leverage as a way to improve their returns. Leverage can be utilized in a variety of ways. An options trader is leveraged to the move of an asset if they buy a call option. If shares soar, the value of the call option should increase much larger on a percentage basis.

Likewise, several ETFs have been created that employ leverage. Investors can simply buy those ETFs for a variety of investment strategies. This avoids the complication of continually trading.

However, leveraged ETFs are far from perfect. Because these funds need to use leverage, they are often dealing with options and futures contracts. Those can lose value over time. This can create a drag on returns.

That’s particularly challenging for investors who dollar-cost average into such funds. Adding consistent amounts to a fund on a regular basis is not a sound approach for leveraged ETFs.

Investors should generally avoid buying and holding a leveraged ETF. Instead, the smarter move is to use these ETFs as timing tools. And to expect to take quick gains before those turn into losses.

Currently, with markets and many assets near all-time highs, leverage appears to be working. When markets shift to a sideways or down trend, leverage will likely create a drag on returns.

Investors should look to use leverage only for short-term trading, and where possible for quick downside opportunities across various asset classes.

 

To review the full impact of using leverage, including leveraged ETFs, click here.

Commodities

Kitco: The Real Reasons to Invest in Silver Now

Posted on by Smart Investing

Year-to-date, gold has not only hit new all-time highs, it’s managed to beat the overall stock market. And while gold has been trending higher, silver has also started to show some signs of strength.

Gold tends to move for fundamental reasons. Gold is typically owned for asset protection purposes. But silver, while also a precious metal, is far more useful for a number of industrial purposes. That could help push silver higher than gold in the years ahead.

Fabrication and industrial demand for a number of technologies, including solar panels, has been a boom for silver.

Investor demand has also been on the rise, and changes in investor demand can make a big difference in terms of price trends.

And while demand has risen, new supplies have been coming online at a slower pace.

That suggests that silver could be in for a major price jump. CPM Group believes that could happen within the next two years, and mark the biggest move relative to gold in over a decade.

Investors looking for a strongly-performing metal may find better opportunities with silver rather than gold.

Buying shares of a producer such as Silvercorp Metals (SVM) could provide that upside exposure in the years ahead. Shares are already up over 100% in the past year as silver has gradually trended higher. A massive spike higher in silver could lead to further returns.

 

To review the latest analysis on the silver market, click here.

 

Economy

QTR’s Fringe Finance: All Hat and No Cattle

Posted on by Smart Investing

One of the top tech stories of the past decade has been the rollout of electric vehicles. Even as recently as 2010, it seemed unlikely that they could be produced at mass scale. Or provide a consistent driving experience for daily use.

However, that all changed with Tesla Motors (TSLA). The EV manufacturer not only developed several EV models, they were stylish, accelerated speedily, and are fun to drive. Of course, Tesla’s larger-than-life CEO, Elon Musk has done far more.

With startup SpaceX, Musk has found ways to significantly lower the cost of orbital launches. Between that and buying Twitter, the co-founder of PayPal (PYPL) has at times been the world’s wealthiest man.

Part of that wealth creation has come from the easy money policies of the past 15 years. Most of the growth of Tesla and SpaceX has come amid a world of near-zero percent interest rates. That low-cost capital has made financing less expensive than it would otherwise cost.

Capital markets allow companies to expand. Usually smaller companies start with borrowing.

That trend has slowed in recent years as interest rates have started to rise. For Musk and Tesla, SpaceX, and privately-held Twitter, that makes the cost of financing this empire from growing further. And Musk could continue to face challenges from the publicly-traded Tesla.

That suggests that investors may have a rockier ride with tech stocks going forward, even with interest rates starting to trend lower now.

 

To read the full analysis on Elon Musk’s empire and the challenges ahead, click here.

Economy

Swordfish Trading: It’s Time for Bonds

Posted on by Smart Investing

Markets continue to trend higher. That includes stocks, but also gold. Rising asset prices leave markets a bit extended right now. That suggests a possible pullback ahead of the election.

For now, investors may want to look for assets that haven’t gotten overbought yet. That’s a tough opportunity to find right now, with so many assets near their highs. However, conditions appear ripe for, of all things, bonds.

Why? For starters, bond prices are structured to rise as yields fall. The Federal Reserve has started to lower interest rates. Just as raising rates in 2022 and 2023 led to falling bond prices, the opposite should occur now.

With the 10-year U.S. Treasury yield still near 4%, today’s buyers can get a reasonable rate. It’s also one of the highest rates over the past 15 years. As yields decline, the price of the bond should rally to adjust the yield lower.

Corporate bonds offer higher yields. And they should also rally with interest rates trending lower. But unlike government bonds, corporate bonds carry some company-specific risks to them. That’s why they tend to have higher yields to begin with.

For those in a high tax bracket or high tax state, municipal bonds could be valuable for their tax advantages now as well.

 

To get the details on why now may be time to lock in bond yields, click here.