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10 trading lessons for 2019 that we learned from the 2018 stock market selloff

Brian Shannon
·Brian Shannon

By Brian Shannon, CMT

Every year there are opportunities to learn from winners and losers in the market. The year 2018 was an extraordinary one in many regards, but in also just a normal year of fluctuating prices. In hopes of learning from what may have been the year’s avoidable losses, I’m going to highlight 10 categories of losers. Hopefully, these lessons will help you going into 2019, a year in which most stocks are starting out in downtrends.

Lesson 1: “Blue Chip” is a marketing term. Owning these stocks will not shield you from losses

Source: www.marketsmith.com

According to Investopedia, “A blue chip is a nationally recognized, well-established, and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth.”

IBM’s share price finished 25.6% lower in 2018, and it is one of many blue chip stocks that were punished by the market in 2018.

Lesson 2: Never buy a stock just for its dividend

Source: www.tc2000.com
Source: www.tc2000.com

The Kraft Heinz Company (KHC) pays its shareholders a dividend of $0.63 per share each quarter. If you owned the stock for the full year, you would have received 3.20% just to hold the stock! That is what dividend enthusiasts will tell you. But was it worth 3.20% in taxable income given that the stock plummeted by 44.6% in 2018? Now that the dividend yield is 4.50%, is it a good buy? The trend is still lower, so there is no hurry to “lock in” that yield.

Lesson 3: Small biotech stocks have unique risks

Source: www.marketsmith.com
Source: www.marketsmith.com

Who doesn’t want to root for a little biotech company on the verge of making a breakthrough in medical technology? The stories that go along with small biotechs are alluring. Oftentimes, the science isn’t as advanced as the company claims, or the stock has gotten ahead of reality. Whatever the reason, if you look each day at stocks with the most dramatic downside moves, you will see a high proportion of biotech stocks. Understand their risks and keep your position size smaller than you would in more established stocks. Shares of vTv Therapeutics (VTVT), for example, show the dramatic swing that little biotech stocks experience more than any other large group of stocks.

Lesson 4: Inverse stock splits do not create value

Source: www.tc2000.com
Source: www.tc2000.com

An inverse (or reverse) stock split reduces the total number of shares outstanding, but but it does not create any value because the stock price is adjusted higher. Consider the 1:250 split in shares of Helios and Matheson (HMNY). On July 24, the stock closed at $0.09 share. The next day the stock closed at $10.50 after its reverse split — sounds impressive right? Well if you divide 10.50 by 250, you realize that the stock closed at an adjusted price of $0.042, down over 50% over night! Reverse stock splits are often a gimmick to keep the share price high enough to avoid being delisted by the exchange on which it trades.

Lesson 5: “Story stocks” are great when they are rising, but price tells the longer-term truth

Source: www.marketsmith.com
Source: www.marketsmith.com

Overstock.com (OSTK) got a lot of attention at the beginning of 2018 as it tried to shift its business to cryptocurrencies and blockchain technologies. When the cryptocurrencies were hot, this shift was great for the share price. As the crypto story began to fade, OSTK stock plummeted 85% from its 2018 high and finished the year with a loss of 78%. When price tells you the story doesn’t make sense from a shareholder standpoint, stop listening to the public relations department of the company and start listening to price action! Only price pays!

Lesson 6: Stocks don’t always go public at a time when it’s the best time to buy

Source: www.marketsmith.com
Source: www.marketsmith.com

The IPO process is part of what makes the markets great. They create an opportunity for the public to own a piece of a company that was previously privately held. The money from the public sale is supposed to be used to help the company grow its business. There are times when an IPO seems more like an opportunity for insiders to cash out before their business declines.

Shares of ADT Inc. (ADT) came public at a price of $14.00 per share but never traded higher than $13.00 as a public company. It finished 2018 at $6.01 — 57% lower than the public sale price. It seems like the only ones who made money on this deal were the insiders at the company, the investment bankers and some savvy short sellers.

Lesson 7: From failed moves, come fast moves in the opposite direction

Source: www.marketsmith.com
Source: www.marketsmith.com

When a stock experiences a “breakout” to a new high, it often leads to a continued trend higher. If the breakout fails to hold its initial gains, it may lead to a large move lower. Notice the circled 52-week high that shares of TTM Technologies (TTMI) made in early August. It never eclipsed that first day breakout move and finished 2018 down 51% from that breakout.

Lesson 8: Big winners can become big losers

Source: www.marketsmith.com
Source: www.marketsmith.com

Shares of Spotify Technology (SPOT) had what looked like a highly successful IPO in April 2018. The company priced its shares at $132, and over the next four months rallied to just under $200 without ever breaking below the IPO price. The stock showed signs of trouble in mid-September as it broke below (and then stayed below) the 50-day moving average. Once that indicator acted as resistance later in September, the real selling began, and the stock dropped nearly 50% from its high and closed the year 14% below its IPO price.

Lesson 9: A stock in a downtrend is considered ‘guilty until proven innocent’

Source: www.marketsmith.com
Source: www.marketsmith.com

One of the tenets of technical analysis is, “A trend, once established, is more likely to continue than it is to reverse.” Shares of Hain Celestial (HAIN) were in a downtrend from early January right up to the last day of 2018. During the summer, it looked like the stock was trying to stabilize above $26. But with the 50- and 200-day moving averages declining, it told us not to trust rally attempts. This may be one of the most valuable lessons heading into 2019, when most stocks are not only in down trends, but also below declining 50- and 200-day moving averages. After large declines, stocks can take a lot of time to heal, and rally attempts should be viewed with an eye of suspicion while they are below longer-term moving averages.

Lesson 10: Just because a stock was positive in 2018 doesn’t mean the average participant made money

The Volume Weighted Average Price (VWAP) tells us the average price per share that a stock traded at over any time studied. The VWAP tells us the true dollar price average, in which each share traded receives an equal weight in the calculation. Shares of Square (SQ) closed 2018 at a price of 56.09 which is a gain of 61%, but the volume weighted average price over the year was 62.30. That means the average price Square traded at during 2018 was 11% higher than where it closed. That means the average long participant was down on a stock which that was up over 61%. Timing matters!

Source: www.tc2000.com
Source: www.tc2000.com

If you are interested in seeing dozens of other examples of these lessons, please join Brian Shannon for a live, interactive webinar on the subject on Wednesday January 9, 2019 at 4:30 pm ET. Please register here.

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