So we just had a peaceful Chinese New Year, and although we were not allowed to visit friends, seeing the COVID-19 cases decreasing lately, I felt relieved. I would not have expected this when hearing the 5000 cases reported in a day. More positively, we can see countries like US and UK’s cases have declined significantly. Many have started to believe the vaccines are working and the world is on its path to economic recovery. There are a few signs to observe that the worst could be over.
First, the crude oil price has increased steadily from around $50 to $60 / barrel in merely a month. Although the U.S index had a correction toward the end of January 2021, it quickly resumed the uptrend and continued breaking new highs. At the time of writing, almost all the stock indexes around the globe are bullish. In addition, the broad upswing in commodity prices since the past few months is another sign of returning demand. More Wall Street analysts have shared that we are at the beginning of commodities super cycle, owing to the unprecedented monetary and fiscal policies. Moreover, companies with recovery themes, such as banks, energy, theme parks, and airline share prices have been moving north, too.
Assuming there are no destructive black swan events occurring, we could be in the beginning of spring. So how do we welcome the arrival of spring? Through spring cleaning! Like what we usually do for our loving homes, we need to spring clean our stock portfolio to enjoy a better return. So how do we do it? Before we get our hands dirty, let us have a look at a chart that depicts a possible spring.
This is the Crude Oil WTI Future price chart up to the 15th of February 2021. Clearly, the oil price has commenced an uptrend since mid-November 2020. You can see the bull has emerged stronger when the candles are seen moving away from the pink (MA50) and golden lines (MA200). The recent breakout above $54 since February 2021 has further confirmed the market confidence.
After an aggressive run fornearly two weeks, it would be healthier for the bull to take a breather and settle below $60. If this happened, the immediate resistance would be at $60 followed by $65.
Spring Cleaning your Portfolio
The rationale is similar to our home spring cleaning. You just have to be aware of what you have, and decide what to keep or throw. It works differently in trading and investing.
If you are a trader, consider cleaning up (sell) your stock if the below scenarios have occurred:
1) A downtrend has formed and the candles have moved below the MA50 line.
2) Share price has broken a critical support, such as the previous low, a round number or a gap.
3) The short and mid-term moving average (MA) lines, such as MA8, MA10, MA30, MA50 is trending downwards. It simply means there are more sellers than buyers.
4) Your counter is already in losses which are above your risk level.
If you are an investor, consider cleaning up (sell) your stock if the below scenarios have occurred:
1) The company’s prospect is no longer as bright or has become unclear. For instance, the pandemic has affected many food and beverage companies. Although we believe the pandemic will go away one day, no one knows when.
2) The earnings have been below market expectation for more than two quarters without justified explanation. As investors, we understand there are uncertainties that would affect company’s earnings. However, if the disruption is prolonged and the management cannot resolve, it is not a good sign.
3) When you have found a better investment. Investing is a probability game. You want to invest in companies with lower risks but higher chances of return. For example, if you have found company B with much higher earning visibility than company A, you know which one to choose.
4) The counters you have are out of theme. Instead, select the counters with theme especially when it’s at an earlier stage. For example, energy, travel, banking industry are themes for economic recovery.
Here is the good news; you do not have to wait for spring to do spring cleaning. To gain better outcome, I encourage you to do it more regularly.