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Crash Party - Who missed it?

Updated: Jan 26, 2023


Probably many investors feel anxious about the stock market crash since beginning of 2022. That is perfectly understandable as nobody like to see their wealth burning day by day.


Sitting in cash looked by far not a good alternative considering the astronomic inflation figures. As of December 2021, the inflation rate reached another peak, touching 7%. And I am not sure if the trend is going to slow down. See the below US inflation chart from Statista.


Monthly Inflation rate
Monthly Inflation rate (source: www.statista.com)

Everybody is talking about a stock market crash in 2022, and this does not our anxiety at all. Therefore, I will try to be more optimistic and search for some green colors in this red period.


A fair but difficult question in these times is whether there are assets which were able to protect the investors' money. That is what we are going to answer in this article, by examining different assets.

 

The S&P500


Being so widely diversified, S&P500 index fund became a benchmark for stock investors. Even if it holds 500 different companies, it managed to drop about -8% since the beginning of the year. If you pay attention to the chart below you will see that it even does not intend to stop that nose diving.

S&P500 crash in 2022
S&P500 chart since August 2021

I hope it will stabilize at the $4,300 mark, where it will find its support line from October 2021.


I bet you won't believe, but there are components in S&P500 which did incredibly well this year. Not one company, not two or three, but tens of companies have green Year-To-Date figures. Below are the top ten of them, as shown on www.slickcharts.com:

S&P500 top 10 YTD components
S&P500 top 10 YTD components (source: www.slickcharts.com)

It's a strange sentiment looking at these numbers and knowing my portfolio is in red...


I'm sure you would be interested if that is the situation also for the tech index. So, let's take a look.

 

Nasdaq Index

As it is easy to anticipate, Nasdaq index had an even worse time, at least due to higher volatility compared with S&P500. It slipped down more than -12%. The chart is not showing any tendency to stop and it actually broke-out the resistance level in the $14,600 region.

Nasdaq Index crash in 2022
Nasdaq Index chart since August 2021

Terrifying...but let's search for green lights, as promised.

Nasdaq100 top performing components of 2022
Nasdaq100 top 10 YTD components (source: www.slickcharts.com)

As you can see in the above picture from Slickcharts, there are also some well performers. Surprisingly, they are not that bombastic as S&P500 top performers, but still it is good that at least some companies are contributing to pull us up.


The next logical aspect is to check is to which sectors do these stocks belong. So let's move to the next chapter.

 

Sectors' performance


There is only one sector in green this year. Surprisingly or not, that's the Energy sector. With its +12% YTD performance it outshines completely all the other sectors. Here is an overview of the sectors from Fidelity:

Sector performance in 2022
Sector performance in 2022 (source: www.fidelity.com)

Now we are all tempted to run and buy energy stocks. But please be aware that the 5-year performance of the energy sector is -12%, and it did not yet recover since its last peak in 2014!


I would like to decompose it and have look at individual stocks, but there is no point as this information is already available in the previous pictures. I would rather have a look if there are some ETFs worth to be considered for investment.


Take a seat an be prepared, as the results will be by far over expectations. I will highlight three ETFs: the largest, the slow performer and the rocket(with turbulences):

Ticker

Name

YTD Performance

10Y performance

​XLE

​ENERGY SELECT SECTOR

​+12.5%

-6%

​EMLP

ENERGY INFRASTRUCTURE FUND

-0.28%

+22%

QCLN

GREEN ENERGY INDEX FUND

-17.3%

+503%

On the chart that looks even more impressive:

XLE, EMLP, QCLN performance since 2012
XLE, EMLP, QCLN performance since 2012

Are any of them worth as long term investments? I don't think so. Personally, I would rather use the energy sector and the XLE or EMLP in particular to dynamically allocate the portfolio in an attempt to anticipate the economic flow.

 

How commodities started the 2022


As always, the commodities market is at least as controversial as the Equities market. First we need to differentiate between different types of commodities. Let's just have a look at top performing materials from the most relevant types, data from Tradingeconomics.


Energy

Top energy commodities 2022

Metals

Industrial

Needless to say, one have significantly benefited from these assets, although there are red examples as well (not shown above).


In general, commodities are considered to provide some hedge against rising inflation, as the prices of materials tend to go up (that's why it is inflation, right?).

Please note, that the king of the metals, Gold, did not move significantly.


Trading and understanding commodities is a very complex and ambitious target. Focusing only on them might not be the best strategy. However they could be a good diversification advantage, as they tend to have low correlation to the equities market.


There is one more asset to investigate which is at least as controversial as precious metals.

 

Cryptocurrencies - digital gold?


Being so widely known and traded, Cryptocurrencies started to play a significant role when evaluating hedge options against crashes, and they are an indispensable in every market analysis article.


Unfortunately, I am afraid the "digital gold", Bitcoin, underperformed the physical metal, as it nose-dived since the beginning of the year. It continued its downtrend towards lower lows, broke the resistance at $41,000 and currently is at about -26% YTD "performance".

Bitcoin chart - continuing the down-trend
Bitcoin chart - continuing the down-trend

As we did in the other chapters, let's check whether there are other coins from the cryptocurrencies world that performed better. I will not look into crypto crosses, just coins against US dollar.


Well, the situation of the top ranked coins looks quite dramatic. Here is an overview which I got from Cryptorank:

Performance overview of the top ranked Cryptocurrencies
Performance overview of the top ranked Cryptocurrencies

As it can be seen, beside USDT and USDC, which broke even so far, the others are having a blood bath. Who are capable to HODL are real men!


Although the Cryptocurrencies are also considered a hedge and they are not correlated with the stock market, this time they failed to conserve investors' portfolios.

 

Final Word - The three possibilities


There is no perfect asset, no perfect market and no perfect portfolio. In general, I see three possibilities for investors, regardless of the current market situation.


Keep calm and look far ahead


That is simply holding broad market indexes and don't care about the short or mid-term volatility. Eventually, continue to buy as per Dollar Cost Averaging technique.


This is especially valid if holding the S&P500 or the tracking ETFs, such as SPY. Just look at the chart below. You can barely notice the current drop.

S&P500 long term chart
S&P500 long term chart

It's true, there where extreme crashes in the past, but there were also just short corrections. The long-term trend is clear. So one could just put money regularly and get advantage of the compounding effect.


If you are wondering how compounding works, we created this awesome and simple Compound Calculator.

Active trading


This is a more active approach and it implies that the investors are trying to understand the market behavior and the individual assets, they apply fundamental and technical analysis in order to determine where to invest and when to invest.

This approach can overperform the market, but it can as well underperform. Imagine if you were anticipating the current downturn and you decided to move your investment into cryptocurrencies since you thought that would be the right thing to do. Well, it proved itself not to be.

Selecting individual assets as stocks, can significantly increase the profits and investors can beat the market, but they shall be very well understanding what they are doing. Not to say that it requires much more time, and probably paid tools to make their research. That's why I encourage you to study and educate yourself as much as possible.


Follow the channel and ride opportunities


This is a semi-active investment strategy which can be applied over a well diversified portfolio or a portfolio built on index funds. The idea is to dynamically rebalance between cash and allocated money. When the market is over-bought sell a part of holdings to hold more cash, and vice-versa, when there are dips use the cash to buy more shares.


In addition nothing prevents investors for trying on sweet opportunities such as Tesla or Nio. These investments can keep alive the fun and adrenaline which there is also a safer portion of the portfolio. Eventually, this opportunities can pay-out very well.


Regardless of the way you decide to invest, make sure you know what you are doing and try to make judged decisions. Automatic Stop Losses can also help you minimize your losses in case of wrong decisions.


If you don't agree, or have other techniques which work, I invite you to share that in the comments section.

 

That's mainly it from my side on this subject.


I wish you all good profits, regardless of the technique which you decide to apply


Hope this was useful for you! Please note that the above content is not an investment advise and shall be considered only for informative purpose.


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