Raise Cash By Selling Extended Tech Stocks: Analog Devices

With the recent strong rebound in share prices, the broad market index price is now extended but still in a downtrend. The bottom of that downtrend historically has been marked by an improvement in the gross profit margin and, so far, that is not evident.

The average gross profit margin is still unusually high and falling at the average U.S. company. Corporate growth fell in the recent first quarter 2020 financial statements, extending a declining trend that began in the last quarter of 2018. The gross profit margin has dropped for the third consecutive quarter both on average and more frequently. This is a highly correlated factor that has been a reliable predictor of the direction of share prices.

The shape, timing and magnitude of the recovery is the critical issue now. The surprise development in the first quarter was an improvement in the gross profit margin of basic industry and the decline in the gross profit margin of the technology sector. That provides a hint that the recovery leaders will be industrials and commodities.

That leadership shift might be expected in the context of huge deficit spending and disrupted global trade. Particularly important now since depressed share prices are more common among industrial companies and extended share prices are more common in technology.

Maintain Cash Reserves

Sell your falling growth companies with shares trading at premium prices and only seek rising gross margin companies with improving financial condition. Maintain a defensive cash position (20% to 30%) and take advantage of the increased share price volatility.

In the technology sector look for falling sales growth (a red trunk of the MoneyTree) and a declining gross profit margin (a red top rim of the MoneyTree pot). Sell those with premium share prices. Otos will support you to find those vulnerable stocks in your portfolio. In the industrial and commodity sectors, the issue is financial condition. It is too early to measure the shape of the recovery and the second quarter financial statements are likely to be influenced by the huge temporary stimulus spending by governments.

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