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President Trump said Tuesday the U.S. will experience a “very, very painful two weeks” because of coronavirus suffering and death. As a result, the stock market has fallen. However, stocks rose after Dr. Anthony Fauci, director of the National Institutes of Allergy and Infectious Diseases, said a few days ago that as many as 200,000 Americans may die from the deadly virus.
The stock market is complex. Sentiment, securities positioning, technical aspects, short-squeezes and other inputs sometimes overrule the facts.
Here is the key question for investors: Will the “mother of support zones” in the stock market hold? Let’s explore with the help of two charts.
Charts
Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA, -2.26%, which represents popular stock market index the Dow Jones Industrial Average DJIA, -2.20%.
Please click here for a chart of S&P 500 ETF SPY, -2.68%, which tracks the S&P 500 Index SPX, -2.65%.
Note the following:
• The first chart, which is monthly, gives investors a long-term perspective.
• The second chart, which is daily, gives a short-term perspective.
• The first chart shows what I call the mother of support zones for the stock market.
• The first chart shows that the stock market touched the mother of support zones and then rallied above the top band of the upper support zone.
• I have previously written that the rally is likely to fail.
• I have previously written that the mother of support zones had an 80% probability of holding.
• The first chart shows that an Arora call as early as Jan. 22 was that an external event could cause a drop in the stock market. Subsequently on Jan. 30, when I wrote that greed and arrogance was driving the stock market higher, I temporarily retreated from my usual polite words to get investors’ attention to the stupidity of aggressively buying at that time. Did investors listen? Some did, but many did not — the stock market rose to a record on Feb. 19.
• The chart shows Arora signals to buy inverse ETF SQQQ, +5.42% and to short-sell Nasdaq 100 ETF QQQ, -1.73% near the top of the stock market and taking profits near the bottom before the rally gained steam.
• The second chart compares S&P 500 ETF US:SPY to semiconductor ETF SMH, -1.16% and Nasdaq 100 ETF US:QQQ.
• It is important to note the top four holdings of QQQ are Apple AAPL, -2.57%, Microsoft MSFT, -0.50%, Amazon AMZN, -0.90% and Facebook FB, -2.14%. The top four holdings of ETF SMH are Taiwan Semiconductor TSM, -1.05%, Intel INTC, +0.41%, Nvidia NVDA, -2.34% and ASML Holding ASML, -2.14%. The reason it is important to note the top holdings of these ETFs is because investors are hiding in them and similar stocks.
• There is merit to hiding in the stocks named above because those companies have solid balance sheets and are likely to recover quickly.
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.
What’s next
The stock market’s outcome, in large part, will be determined by investors either remaining in those stocks or throwing in the towel. Investors should evaluate this on a daily basis using segmented money flows as one of the best clues at this time.
Protection bands
Even though the stock market has rallied, there has been no all-clear signal. As we have previously written, the sharpest rallies occur in bear markets. Rallies of about 20% are to be expected. In this coronavirus-influenced stock market, it is important that investors use an objective framework of protection bands before buying stocks. For details, please see “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide.”
Answers to your questions
Answers to some of your questions are in my previous writings. You can access them 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.
