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What are the effects of the coronavirus on life in the U.S.? Lost lives, lost jobs, trauma, shutdowns and trillions in borrowing and money printing.
What does Wall Street say? The coronavirus doesn’t matter to the stock market. Wall Street wants you to believe it’s safe to buy.
What happened to prudence for investors in the stock market? Let’s explore with the help of two charts
Two charts
Please click here for an annotated chart of the SPDR Dow Jones Industrial Average ETF DIA, +3.07%.
Please click here for an annotated chart of SPDR S&P 500 ETF SPY, +2.70%.
Note the following:
• The first is a monthly chart giving investors a long-term perspective.
• The second is a daily chart giving investors a short-term perspective.
• The first chart shows that the stock market touched the “mother of support zones” and bounced up strongly.
• The mother of support zones shown on the first chart was given by the Arora Report prior to the stock market’s decline, when we said that there was an 80% probability of the support zone holding. So far that call is spot-on.
• The second chart shows an important point in October 2019 when the Federal Reserve started injecting additional liquidity into the repo market.
• The second chart shows that the stock market took off after the Fed started injecting the new liquidity.
• The second chart shows the drop in the stock market caused by the coronavirus crisis.
• The most important point is that the stock market is now back to about the same level where it was in October 2019. Since then, the coronavirus has caused many deaths, many jobs lost, a lot of trauma and massive economic dislocation. A conclusion that can be drawn is that the stock market believes that none of that matters, otherwise it would not have reached back to the pre-liquidity injection level.
Do you believe Wall Street?
Think about the following:
• Wall Street is set up for you to buy stocks.
• Wall Street is set up to keep you in the stock market.
• It is career suicide for a Wall Street analyst to stay bearish if the market continues to go up. On the other hand, if the market goes down and the stock market analysts are bullish, it is not their fault — they just couldn’t foresee the coronavirus’ effects.
• At the market top on Feb. 19, 2020, Wall Street analysts were tripping over themselves to raise their stock market targets. Now they are beginning to do it again.
• Buying is aggressive in momentum crowd favorites such as Apple AAPL, -1.35%, Amazon.com AMZN, -1.37%, Advanced Micro Devices AMD, -0.61% and Tesla TSLA, +1.16%.
Should you buy or sell?
Bear markets are characterized by sharp rallies. If a cure is found soon, the rally will continue. In the absence of a cure, the probability is high that the rally will fail. Investors should use an objective framework for buying and selling. 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.
