Feb. 25, 2020, 10:55 a.m. EST

Buffett is bullish on stocks but says the market can drop 50% — is he wrong?

Amid a 10-year-plus bull market, many investors can’t come to terms with the idea that there could be a substantial decline in the stock market

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By Nigam Arora

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• Semiconductor stocks have been the leaders on the upside. Consider watching stocks such as AMD /zigman2/quotes/208144392/composite AMD -2.40% , Micron Technology /zigman2/quotes/205710729/composite MU +1.44%  and Nvidia /zigman2/quotes/200467500/composite NVDA -0.28% for clues.

• Apple /zigman2/quotes/202934861/composite AAPL +0.25% has major exposure to China. Watch for a decisive break of the $300 level.

• Investors have been hiding in large-cap tech stocks such as Amazon /zigman2/quotes/210331248/composite AMZN +0.55% , Microsoft /zigman2/quotes/207732364/composite MSFT -0.30%  and Facebook /zigman2/quotes/205064656/composite FB +0.23% . Consider watching these stocks to see if they break their support levels. Please see “Stock market generals are marching ahead, but the troops aren’t following.”

• The move up in gold has been very strong since the recent breakout. Consider watching gold ETF SPDR Gold Shares /zigman2/quotes/200593176/composite GLD -0.26% , silver ETF iShares Silver Trust /zigman2/quotes/205744453/composite SLV +0.29% and gold miner ETF VanEck Vectors Gold Miners ETF /zigman2/quotes/206399889/composite GDX -1.01% . Please see “Gold breakout’s while the stock market is rising should concern investors.”

• The chart shows the Arora signal to start a short-term trade to buy inverse leveraged Nasdaq 100 ETF /zigman2/quotes/202448809/composite SQQQ -2.22% and for those who can short-sell, to do so using Nasdaq 100 ETF /zigman2/quotes/208575548/composite QQQ +0.68% . An inverse ETF goes up when the stock market goes down.

Down the elevator

There is an old saying that stocks go up the stairs but come down the elevator. A big, quick drop in the stock market is not unusual, although investors who have gotten used to recently overly bullish behavior in the market may not remember the true nature of the stock market.

Long term and short term

Investors can increase their returns and lower their risks by diversifying their portfolios among time frames. That way, if investments do not work out in one time frame, they tend to work out in a different time frame.

Complacency

Even as coronavirus fears are spreading across the stock market, investors are still too complacent. Greed is still overwhelming fear. Please see “Extreme greed in the stock market is producing a bad setup as earnings season starts.”

Many investors simply do not believe that the stock market can go down with the Federal Reserve willing to do whatever it takes to prop up the stock market. Please see “Stock market investors’ motto — ‘in central banks we trust’ — is still working.” Even among those who accept that the stock market can fall, many believe any downturn will be short-lived and the best way is to ride it out.

I have been a student of the stock market and an investor for over three decades. My observation is that what investors plan and say when the stock market trend is still up is very different from what investors do when the stock market falls. It is best to protect long-term portfolios with cash and hedges in a judicious manner. As the chart shows, The Arora Report’s long-term portfolios are up to 57% protected.

Investors ought to pay attention to the fact that even Warren Buffett uses the verb “will” to describe drops in the stock market of 50% or even greater in his carefully written letter.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. <INTERNAL-PAGE URL="/author/nigam-arora">Nigam Arora</INTERNAL-PAGE> 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.

/zigman2/quotes/208144392/composite
US : U.S.: Nasdaq
$ 55.88
-1.38 -2.40%
Volume: 59.84M
July 10, 2020 4:00p
P/E Ratio
134.85
Dividend Yield
N/A
Market Cap
$65.45 billion
Rev. per Employee
$641,089
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/zigman2/quotes/205710729/composite
US : U.S.: Nasdaq
$ 50.70
+0.72 +1.44%
Volume: 18.13M
July 10, 2020 4:00p
P/E Ratio
25.45
Dividend Yield
N/A
Market Cap
$56.33 billion
Rev. per Employee
$832,917
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/zigman2/quotes/200467500/composite
US : U.S.: Nasdaq
$ 419.17
-1.19 -0.28%
Volume: 12.44M
July 10, 2020 4:00p
P/E Ratio
78.28
Dividend Yield
0.15%
Market Cap
$257.79 billion
Rev. per Employee
$882,428
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/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 383.68
+0.95 +0.25%
Volume: 22.56M
July 10, 2020 4:00p
P/E Ratio
30.08
Dividend Yield
0.85%
Market Cap
$1663.00 billion
Rev. per Employee
$1.98M
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/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 3,200.00
+17.37 +0.55%
Volume: 5.49M
July 10, 2020 4:00p
P/E Ratio
152.86
Dividend Yield
N/A
Market Cap
$1596.08 billion
Rev. per Employee
$359,671
loading...
/zigman2/quotes/207732364/composite
US : U.S.: Nasdaq
$ 213.67
-0.65 -0.30%
Volume: 26.18M
July 10, 2020 4:00p
P/E Ratio
35.58
Dividend Yield
0.95%
Market Cap
$1620.35 billion
Rev. per Employee
$902,473
loading...
/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 245.07
+0.57 +0.23%
Volume: 22.98M
July 10, 2020 4:00p
P/E Ratio
33.58
Dividend Yield
N/A
Market Cap
$698.78 billion
Rev. per Employee
$1.57M
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/zigman2/quotes/200593176/composite
US : U.S.: NYSE Arca
$ 169.19
-0.44 -0.26%
Volume: 8.22M
July 10, 2020 4:00p
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/zigman2/quotes/205744453/composite
US : U.S.: NYSE Arca
$ 17.43
+0.05 +0.29%
Volume: 20.45M
July 10, 2020 4:00p
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/zigman2/quotes/206399889/composite
US : U.S.: NYSE Arca
$ 38.40
-0.39 -1.01%
Volume: 21.90M
July 10, 2020 4:00p
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/zigman2/quotes/202448809/composite
US : U.S.: Nasdaq
$ 6.18
-0.14 -2.22%
Volume: 82.76M
July 10, 2020 4:00p
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/zigman2/quotes/208575548/composite
US : U.S.: Nasdaq
$ 263.97
+1.79 +0.68%
Volume: 32.89M
July 10, 2020 4:00p
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Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and the founder of two Inc. 500 fastest growing companies. He is also the developer of the ZYX Change Method to profit from change by investing. The premise is that most money is made by predicting change before the crowd. Arora is the chief investment officer at The Arora Report and the editor of four newsletters that track the ZYX Change Method. Nigam can be reached at Nigam@TheAroraReport.com

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