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The momo (momentum) crowd in the stock market has it all figured out. “Good” news is “great” news. “Bad” news is “good” news. There is nothing that cannot be twisted into a reason to buy.
Is Bernie Sanders’ win in New Hampshire a good thing for the stock market? Wall Street says “yes” because this makes Donald Trump stronger. Is coronavirus a good thing? Wall Street says “yes” because central banks will print more money. Why not buy on the news of the coronavirus and then buy again on the news of the coronavirus’ spread slowing? No kidding, the crowd is now buying on the news of the coronavirus slowing, even though the stock market is higher now than when the coronavirus first emerged.
Why not buy on bad economic data, as it will simply make central banks inject more liquidity? This is exactly what is happening.
In the middle of all this so-called “good” news, investors ought to note that the generals are rushing to the front line, but the troops aren’t following. Does anyone see anything wrong with this strategy?
Let’s explore with the help of a chart.
Please click here for a chart that compares three ETFs and four stocks.
Note the following:
• The Dow Jones Industrial Average DJIA, +0.94% is a price-weighted index. Dow Jones Industrial Average ETF DIA, +0.95% is performing in line with equal-weighted S&P 500 ETF RSP, +0.69%.
• The S&P 500 Index SPX, +0.65% is a cap-weighted index. Mega-cap tech stocks such as Facebook FB, +1.72%, Amazon AMZN, +0.43% and Apple AAPL, +2.37% carry a heavy weighting in this index.
• The chart shows that S&P 500 ETF SPY, +0.64% is significantly outperforming the equal-weighted S&P 500 ETF.
• Microsoft MSFT, +0.15% has left even Apple in the dust, producing more than twice the return of Apple.
• After lagging last year, Amazon’s stock has taken off like a rocket and is now only second to Microsoft in performance.
• Google holding company Alphabet GOOG, +0.63% GOOGL, +0.57% reported less-than-expected earnings. What did Alphabet’s stock do? The dip was aggressively bought and now Alphabet is outperforming Apple.
• Apple derives significant sales from China. Its stores have been shut down in China. Should this concern investors? No, because the Chinese love iPhones and will buy when the stores open — no reason not to be bullish on Apple’s stock.
• Apple’s supply chain is centered in China and is clearly getting disrupted. Is this a reason to not be bullish on Apple? No, scarcity of Apple products will simply make Apple fans want them more — so goes the story.
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What does it all mean?
Stay cautiously bullish but use appropriate defensive measures such as cash and hedges — we provide precise levels that are appropriate now. In the very short term, the market is getting overbought, and sentiment is becoming overly positive, so the conditions are ripe for a pullback.
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.