The following is an article by our good friend Akhil Patel who is based in London.  We thank him for allowing us to reprint it in its entirety.

For those of you who don’t know Akhil, he is the director of Ascendant Strategy a UK based research and advisory firm that specialises in Property and Credit Cycle analysis.

Although this article is written from UK view point we believe it will be of interest to Investment Club Members.

As markets continued to fall yesterday, the newspapers were quick to call the next financial crash.

Fears grow over repeat of 2008 financial crash as investors run for cover, worried The Guardian. City AM announced the start of a bear market.

Let’s be clear about what’s going on. A 2008-style financial crisis is not upon us.

To interpret what is going on, you need to understand the economic cycle. Major financial crashes occur at the end of the economic cycle as a land-led bust, based on rampant property speculation, over-extended banks, profligate private and public spending. Such crises take place on average every 18 years in the UK and US historically (a history that goes back over 200 years). This is what we had in the 2000s, culminating in the peak in 2007 and the global financial crisis of 2008.

We are now in the next cycle and the boom is still ahead of us.

If you’re not sure what I am talking about, I strongly urge you to get a copy of my report on the 18 year cycle immediately.

It will give you what you need to know about how the cycle unfolds and how you can understand what is going on when you get these major market events.

Recent market turmoil has been blamed on oil (together with the slowdown in China).

Oil companies make up a significant portion of the capitalisation of many stock markets.  When oil goes down hard as it has done for the last few months, it causes turmoil in markets.

And there are plenty of reasons for oil to be weak. The main oil consumers – the US and China – are not buying as much oil as they used to (the US, because it is making efforts to increase energy efficiency and because it has recently become a major oil producer in its own right; China, because it is slowing down). The main producers in the Middle East – principally, Saudi Arabia – are pumping as much as they can for a host of reasons. And now Iran is back in the international fold, it too will start pumping. Both demand and supply factors explain the weakness in prices.

But the real point I wanted to make is this: think of market turmoil as an opportunity to invest.

Now, why would I say this? Surely, when markets are falling and are very volatile you should stay away.

What such conditions show an investor is which stocks are strong.

Strong stocks are the ones you want to hold. They are held by investors with deep pockets who continue to hold them even when markets go down because they know that their share prices are backed by good earnings. During good times, such stocks go up the most because there are few sellers. And everyone wants to pile into the relatively small number of shares that are available.

And when markets fall, they fall the least. So market panics are an opportunity to identify these.

Here is an example to illustrate what I mean.

Below you will see a chart of the tech-heavy Nasdaq 100, an index of the largest US tech stocks.

akhil 1

For the Nasdaq, 2015 was a pretty difficult year. The index fell in January, then went up for the first half of the year (albeit in a pretty choppy fashion). But it fell sharply in July and August, following the stock market crash in China during the middle of the year. This spooked markets worldwide and the precipitous sell off ran until the low was found on 24th August.

The market then recovered and rose sharply after the low on 29th September – to make a marginally new high for the year.

But it has since fallen hard again after the start of December. It’s lower now than it was at the start of 2015.

Now look at the chart of Alphabet Inc (recently renamed as the parent company of Google). This is one of the stocks within the Nasdaq 100.

akhil 2

It did not have a weak 2015.

While it didn’t have the strongest start to the year, there were some pretty strong moves up during the second half of the year, on the back of robust earnings announcements.

Note how the low in August 2015 was higher than the low at the start of the year. A higher low. The broader index made a lower low.

That was a good indication to me in August that Google was in a strong position. That is, it was a strong stock.

And as the Nasdaq rallied in October and November, Google led the charge. The broader index made a marginally new high for the new year. Google made a new high by some distance. Almost $100 higher per share. For a stock valued at over $700 per share this is a substantial gain.

This was another sign that it is a strong stock.

The recent fall has brought Google down again – but nowhere near the lows of August or even September. Again, the broader index makes a lower low, Google makes a higher low. This tells you that while other stocks are being dumped, people are holding on to Google. Why? Because they expect that its earnings will continue to grow. Sentiment may change in the future but what it is telling you now is that relative to other stocks in the index, Google is in a stronger position.

Now, I am not saying that the low is in place and that you should jump straight in. You have to wait to see what happens. But regardless of that, you know that Google is a stock to be following.

The moral of this story?

Think of market turmoil as an opportunity. An opportunity to identify strong stocks. When everyone else is worried, you should start doing your research and think of being a buyer.

Because when markets start to rally your work will pay off if you build a portfolio based on strong stocks.

– Akhil Patel

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