Loss aversion reversion to mean anti pattern

  • Six consecutive days of price deterioration.
  • 16th May to 22nd May 2019
  • No-significant rebounds were observed during this period
  • Company reported expected losses for the forthcoming two quarters
  • There were significant concerns about ability of company to stay solvent
  • Concerns over trade war is a strong negative head wind.

 

Post 2019 US/China Trade War companies for consideration

The following is a list of microchip related companies to consider once the dust settles

  • AVGO – Broadcom
  • NVDA – Nvidia
  • QCOM – Qualcomm
  • INTC – Intel
  • MU – Micron
  • AMD – Advanced micro devises
  • XLNX – Xilinx
  • MCHP – Microchip Technology Inc

The following is a list of Consumer technology companies to consider once the dust settles

  • WB – Weibo
  • BIDU – Baidu
  • TCHEY – Tencent
  • BABA – Alibaba

Insights from Ilya

  • It does not pay to take on risk when the overall macro economic trend is negative.
  • When the yield curve occurs, a recession typically happens within 12-18 months
  • Bonds yield has not returned to its previous highs from its current levels of 3-4.5%
  • Stock still offers the highest rates of returns in the long term horizon
  • Shares of companies that do not produce a necessity tends to spike in late stages of a bull market
  • Portfolio allocation horizon
    • short term portion of portfolio which you will need to access within 1 to 2 years should be placed in medium term bonds
    • mid term portion of portfolio which you will need to access within 3-5 years that will likely experience at least one recession should be place partially in stocks and partially in bonds
    • long term portion of portfolio which you will need to access within 10 years that will likely experience at least a few recessions should be placed fully in stocks

Learnings from the market today

During a trade war situation, negative news about one Chinese company listed NASDAQ or NYSE will cause negative price movement of other Chinese companies

  • 17th May 2019 – Baidu poor earnings (-16% price decline) causes Weibo share price decline (-11% price decline)

Negative news about a negative law suit outcome for a semi conductor causes negative price movement of other semi conductor companies

  • Apple evades legal claims by Qualcomm causes price decline in NVDIA (-4%) and MU (-10.6%)

Key trading mistakes during execution

Mistakes

  1. Do not hold a position against general macro events like (Trade) Wars
    • Lesson learned: impact of loss aversion and reversion to mean is muted when trade war is occurring
  2. Don’t double down on your mistakes
    • Lesson learned: it is cheaper to admit mistake and cut losess
  3. Committing too much to a position leaving not much liquidity for later. This forces freeing up liquidity at a loss when new buying signals surface.
    • Lesson learned: it is cheaper to under allocate portfolio to a position upfront.
  4. Entering too late into a buy signal by more than 48 hours.
    • Lesson learned: it is cheaper to forget about it when you are late
  5. Entering too early into a buy signal.
    • Lesson learned: it is cheaper to figure out the support level before entering into position.
  6. Don’t enter into position when there are no buy signals.
    • Lesson learned: it is cheaper to wait for a wave than to get carried away by the anxiety that there will never be a buy signal again in this lifetime.
  7. Not verifying assumptions
    • Lesson learned: Seek evidences to challenge your own assumptions. Lessons could be learned when you dig deeper into pass records to for deeper insights.

Additional insights

  1. Sudden news about macro economic events (Donald Trump tweeting) does follow a lose aversion and reversion to mean pattern.
  2. Gradual news about macro economic events (US passing tariffs on China and banning Huawei) will have a long term negative impact.
  3. Price of REITs are:
    • relatively insensitive to trade wars
    • hyper sensitive to Federal Reserve (expected) interest rate changes
  4. Only execute loss aversion and reversion to mean trades on positions that exhibit bullish trends both at the individual stock level as well as at the SnP level.

Related references

15th May post effects of 13th May 2019 US/China Trade war on US markets

The following is a list of 19 companies either in the tech sector or with market capitalization above USD20 billion that experienced more than 10% drop in share price on the May, 13th 2019.

Below is the breakdown in terms of price performance on May, 15th 2019.

  • 2 companies (10.5% of sample) not related to trade war
  • 2 companies (10.5% of sample) fully recovered
  • 7 companies (36.8% of sample) at least 50% recovery
  • 10 companies (52.63%) not recovered by at least 50%

Related references

Macro economic analysis on US/China 2018/2019 Trade war

The 196 pages of Chinese goods to be taxed by the US governments are spread across 6 categories. Where US manufacturers cannot find alternative sources of supplies, price increase of end product will be expected. 

Based on what was observed in December. The ability of the US government to sustain the trade war is predicated upon the Feds keeping interest rate low. 

Taxed categories include 

  • agricultural produce 
  • textiles
  • chemical compounds
  • hardware parts
  • mechanical parts
  • electronic parts

The December 2018 US market financial meltdown can be attributed to US government tariffs to reduce demand for foreign material supplies from China coupled with Feds interest rate hike to limit capital needed to boost domestic production.

The trade war seems to serve three purposes:

  • Drive up demand for domestic supplies
  • To keep inflation in check the economy grows (traditionally a role played by Fed Interest Rates)
  • Keep China in check.

Related references

Donald Trump’s 3rd May 2019 trade war tweets on stock market index around the world

Tweet was posted in May 3rd 2019 where Chinese import tax hike to 25% from 10% was proposed.

Immediate negative effects were most prominent on Hong Kong and Straits Times stock index. An observed 4.5% drop.

Immediate effects were negligible on the Shanghai index as bad news seems like it was already factored a few days prior to the tweet. An observed 6% drop prior to the tweet.

Effects on the SnP was negligible. An observed 0.45% drop. The London Stock exchange (FTSE) seems to be humming to its own rhythm.

Insights from lunch with Manish and Ketan

  • The tech industry is cyclical
    • Consumer Tech is going out of trendy and
    • enterprise is coming into trend
  • Look up for parallels, for example case studies for how the following company grew
    • New Relic
    • Rubrik
  • Co-founder discussions
    • 4 year vesting, 1 year cliff
    • Clarify edge cases like board seat, shares and voting rights in the event of death
    • Date first before marriage
      • need to test them on smaller scope to see if they can deliver (remunerate with profit sharing)
      • if they prove themselves overtime, start exploring larger scope where they can work together (consider with shares)
  • Team configuration
    • product development
      • product management
      • engineering
      • design
    • Enterprise sales
    • Finance – much later when sales is happening

SPY – SnP index during Dec 2018 market pull back

  • The market contracted by as much as 17% (USD290 to USD240)
  • Turn around happened on 24th Dec 2018 during Christmas
    • Negative trading volume was below moving average
    • Positive trading volume was above moving average
    • RSI was in oversold territory ( <30)
  • Macro Factors
    • Trade War
    • Federal reserve interest rate hike