Does a volatile market spell opportunity?

JC Project Freedom Volatile Friday Night
Image by Antonio López from Pixabay

Today is 6th March 2021 when I am writing this. Last night, the stock market was extremely turbulent.

Nasdaq 100 Index 1 year time frame

Nasdaq 100 Index 1 day time frame

Volatile night

If you look at the Nasdaq 100 Index 1 year time frame, it has corrected around 12% from its peak (1- 12235/13885 = approximately 12%). If you zoom in the 1-day time frame as seen in the 2nd picture, this is what short-term volatility looks like. Last night was like a roller coaster. It must have resulted in a lot of retail investors been flushed out from the game due to margin calls or sell in panic.

Margin Call

Why do I believe a lot of people are selling out due to margin calls? I am using Saxo for my options trade and it is a cash account. I have around USD 30,000 in Saxo. Within the first few hours of the US market opening, I kept receiving notifications from Saxo that margin usage increased from 0% to 50% to 65% to 75%, with USD 1500 cash available to deploy.

Why is this irritating and inconvenient? I wanted to sell more PUT options but I could not because of margin level. Why is my margin increased so much within few hours? The prices of the companies which I owned and some of the options that I have been badly affected. I transferred another SGD 40,000 and the HSBC FX rate is pretty bad, I got only USD 29,700. This came in too late as I decided to call it a night. This brings my Saxo account to USD 60,000.

Emails from Saxo

To give you some perspective and also remind me when one day when I read this post again, SEA Limited dropped from USD 230 to USD 209 before recovering back to USD 229. It was a swing of 10% within a day. Most of the growth stocks were affected last night due to the market perceiving that bond yield increases, inflation will increase.

Inflation erodes the purchasing power of a bond’s future cash flow. The higher inflation and the higher yields will rise as investors will demand higher yields to compensate for inflation risk. The future cash flow will be discounted more which affects the valuation. The market is discounting the technology stocks more compared to the traditional value stocks. The economy is opening up, demand for oil and financial services will increase.

10 years Treasury Note yield

Source: Tradingview.com SEA Limited (SE)

End of Technology Stocks?

Is the end of technology stocks? I do not think so. There are a lot of companies that are on a mission to make doing businesses easier, solving problems we care about, helping us to improve our health, solving big problems like climate change. Do you foresee Google going away in the next 10 years? Do you foresee Amazon dying within the next 10 years? The only key is about the valuation at what share price you buy the company at.

Sector Rotation Play

You can read more here from Fidelity. The business cycle changes in the rate of growth in the economic activities. There are 4 phases of a business cycle.

The Early-cycle phase which is a sharp recovery from the recession, is the crossing point from negativity to positive growth in economic activities (low GDP growth back to the norm), follow by accelerating growth. The government will deploy an easy monetary policy to facilitate businesses to have access to funds to grow, this is a healthy environment for rapid growth and expansion.

The Mid-cycle phase is the longest phase of the business cycle, it shows moderate business growth, inventories and sales are growing, credit growth becomes strong.

Late-cycle phase is when the economy becomes very rosy, economic growth rate slow down to a halt. The government will deploy monetary tightening policy, businesses will start to feel credit crunch and lack access to funding. This will lead to business contraction, profit margin will deteriorate and sales growth declines.

The recession phase occurs when economy contracts. Business profit margins drop further and credit is unavailable, then governments will start to realize that they need to start easing up monetary policy to stimulate the economy. The cycle repeats itself, this is macro economy 101 which we learn during our high school.

Source: Fidelity Investments

From the various business cycles, there are different sectors which will do well. Refer to below chart.

Source: Fidelity Investments

My personal take is we are somewhere between Mid to Late Business Cycle Phase, I believe technology stocks will have some more runway. Energy and Financial Services will start to gain traction because of the expectation that economies will open up, demand for flying will increase and the interest rates will slowly increase. In an ideal world, I will sell RDS.B at the right price, followed by Power Assets, HPH Trust, OCBC, and rotate the funds into growth stocks. Pray about this.

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