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There’s a lot converging on investors today. Let’s sort it out.
All signs were there for the coronavirus to move from a phase of containment to mitigation. Still, people have been surprised.
There was a genuine surprise that Russia would declare war on American shale producers by failing to go along with OPEC production cuts. An even bigger surprise has been Saudi Arabia declaring war on Russia by increasing production and giving massive discounts on oil.
What’s gotten lost: Yes Bank, one of the largest private banks in India, has failed. Bank is in the U.S. are generally in good shape, but expect more bank failures overseas. Even some smaller U.S. banks highly exposed to oil and gas may come under stress.
I am paraphrasing the question I am being asked most often: “Should I buy or should I sell?”
To answer the question, let’s build the necessary background with the help of two charts.
Two charts
Please click here for a daily chart of S&P 500 ETF US:SPY, which tracks the S&P 500 Index US:SPX.
Please click here for a long-term monthly chart of the Dow Jones Industrial Average ETF US:DIA, which tracks the Dow US:DJIA. For the sake of transparency, this chart was previously published, and no changes have been made.
Note the following:
• The first chart is an updated version of a chart that was previously published For details, please see “A watershed moment is on the way if stocks can’t hold this level”
• The first chart shows that the stock market gapped down after the “programmed selling” point shown on the chart was violated in futures trading
• The first chart shows that, as of this writing, the lower band of the upper support zone has not been decisively broken
• A proprietary indicator that has served The Arora Report well over the years is the “hate mail indicator” The indicator is derived from the hate messages I get in response to my writing. This indicator shows that there is still too much complacency among investors.
Recently when I wrote to put protections on rallies, I got a lot of hate mail Please see “As the stock market rallies, put protections on your investing portfolio” When I wrote that the No. 1 mistake investors were making was buying because the market was down a certain percentage such as 5%, I got a lot of hate mail. Please see “This is the No. 1 mistake investors are making now — here’s how to avoid it”
The amount of the hate mail has been higher compared to when I wrote back in January that an external event could stunt US. stocks at a time when coronavirus news was just beginning to surface and the stock market was hitting new highs. Please see “How an external event could stunt U.S. stocks”
The sum total is that, at this time, investors are buying more than what is justifiable based on both technicals and fundamentals Investors are still over-invested. This behavior may lead to a short-term rally, but it may not be sustainable.
• The first chart shows that Arora long-term portfolios were up to 57% protected near the top of the market Before the fall last Friday, they were up to 72% protected.
• The chart shows Arora signals to buy inverse leveraged Nasdaq 100 ETF US:SQQQ or short-sell Nasdaq 100 ETF US:QQQ for a short-term trade near the top of the market.
• The first chart shows the second major support zone. Unless there is good news — and, yes, there can be good news — there is a fair probability of the stock market falling to the second major support zone shown on the chart.
• The first chart shows how far the stock market has come since the Arora buy signal given in 2009 to aggressively buy stocks, which has turned out to be the start of the bull market.
• The first chart shows a rising trendline until Donald Trump’s election. There is a risk of the stock market ultimately pulling back to this trendline.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Good news
These seem like dark days, but there is potential good news on the horizon that could reverse the stock market’s decline.
• If the data start showing conclusively that the coronavirus has peaked in China.
• If the data start showing that the coronavirus has peaked in South Korea and Italy.
• One or more antivirals are shown to decrease the intensity of the coronavirus.
• If drugs and treatments are developed that prevent the coronavirus from severely affecting the lower respiratory system.
• A new round of quantitative easing (QE) from the Federal Reserve.
• More interest-rate cuts from the Fed.
• More money printing by other central banks.
• A massive fiscal response from governments.
Some of the steps, such as money printing, are not good in the long term but may help in the short term. Please see “Stock market investors’ motto — ‘in central banks we trust’ — is still working.”
To buy or sell
Markets are complex. It is simply foolish to be looking for simple answers that in reality do not exist. The Arora Report provides a range for the amount of protection based on current market conditions. The high band of the protection is appropriate for those who are older or conservative. The low band is appropriate for those who are younger or aggressive. Currently, the high band of the protection is at 72%.
First, you have to decide where you fall in the protection band based on your personal situation and preferences. If your protection is less than the recommended, consider selling by scaling out on stock market rallies. If your protection is more than the recommended, consider buying by scaling in on bad stock market days.
Short-term trades
A good way to profit from volatility is to take short-term trades when the setups are good. As a note of caution, there is no free lunch. Profiting from short-term trades takes knowledge, self-discipline, experience and proper risk control.
Differentiate between long-term investments and short-term trades. Do both.
Clues
Watch the following for clues.
• Reversal in the yield on the 10-year Treasury bond BX:TMUBMUSD10Y.
• Watch all of the five big-cap tech stocks that investors have been hiding in It is important to watch all five because they offer different clues. The big five are: Apple US:AAPL, Amazon US:AMZN, Facebook US:FB, Alphabet US:GOOG US:GOOGL and Microsoft US:MSFT.
• Watch semiconductor stocks, speculative stocks, the difference in the movement of gold ETF US:GLD and silver ETF US:SLV, and the difference in the movement between GLD and gold miner ETF US:GDX.
• Watch coronavirus and virus vaccine stocks, oil stocks, and oil exploration and oil services ETFs
• Watch how stocks trade after any halts
Four charts
Prudent investors should look at four important charts Please see “Prudent investors should look at these four stock charts as coronavirus spreads”
Answers to your questions
Answers to a vast majority of your questions are already in my previous writings this year You can access some of them immediately and for free by clicking here
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
