Bulletin
Investor Alert

New York Markets Open in:

Oct. 29, 2018, 3:00 p.m. EDT

Here are the six things that could ignite a rally in the stock market

Look at the factors — and their probabilities — that are driving the market

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    International Business Machines Corp. (IBM)
  • X
    SPDR S&P 500 ETF Trust (SPY)

or Cancel Already have a watchlist? Log In

By Nigam Arora


Getty Images

Companies buy other companies all the time, but a 63% premium on an acquisition doesn’t happen every day.

IBM /zigman2/quotes/203856914/composite IBM +1.72% unveiled its largest software acquisition ever by offering $190 a share for Red Hat . I need to start with a full disclosure: The Arora Report gave a signal to buy Red Hat at $43.14 with a call that it was likely to be bought out, most probably by IBM. A 63% premium on a deal is striking. Of course, a 340% gain on our position is putting me in a buying sentiment.

The anecdotal evidence is that the positive sentiment is contagious on this large premium. This is especially important since high-beta stocks like Red Hat have been hit hard. The buying is spreading. However, sellers have not gone on vacation. I have been getting lots of requests to try to figure out where is the bottom in the stock market. Let’s start with a chart.

Chart

Please click here for an annotated chart of S&P 500 ETF /zigman2/quotes/209901640/composite SPY +0.30% . Somewhat similar conclusions can be drawn from the charts of the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.30% , Nasdaq 100 ETF /zigman2/quotes/208575548/composite QQQ -0.43% and small-cap ETF /zigman2/quotes/209961116/composite IWM +1.04% . Please note the following:

• The chart is a weekly chart to help the longer-term investor.

• The chart shows the downtrend line.

• The chart shows the support zone.

• Volume has not been high enough to have washed out weak hands. This is a negative.

• RSI (relative strength index) is very oversold.

• The chart shows RSI is more oversold than in the last correction. When the market is oversold, it often bounces.

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.

Incomplete question

Where is the bottom in the stock market? That is an incomplete question; the bottom for a day, a week, a month or forever? It is important for investors to always look at a bottom along with a time frame.

If the weak hands were washed out, the probability of this being the bottom for at least a few months would have been very high. Now, any bounce is suspect, but several positive factors are coming into play that call for a fair probability of a very short-term bottom. Investors are well-advised to remember Arora’s Second Law of Investing: “No one knows with certainty what will happen next.”

/zigman2/quotes/203856914/composite
US : U.S.: NYSE
$ 127.11
+2.15 +1.72%
Volume: 3.97M
Aug. 10, 2020 4:00p
P/E Ratio
14.42
Dividend Yield
5.13%
Market Cap
$111.29 billion
Rev. per Employee
$208,845
loading...
/zigman2/quotes/209901640/composite
US : U.S.: NYSE Arca
$ 335.57
+1.00 +0.30%
Volume: 44.28M
Aug. 10, 2020 4:00p
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,791.44
+357.96 +1.30%
Volume: 362.50M
Aug. 10, 2020 5:12p
loading...
/zigman2/quotes/208575548/composite
US : U.S.: Nasdaq
$ 270.31
-1.16 -0.43%
Volume: 35.09M
Aug. 10, 2020 4:00p
loading...
/zigman2/quotes/209961116/composite
US : U.S.: NYSE Arca
$ 157.79
+1.62 +1.04%
Volume: 24.00M
Aug. 10, 2020 4:00p
loading...
1 2
This Story has 0 Comments
Be the first to comment
More News In
Investing

Story Conversation

Commenting FAQs »
Link to MarketWatch's Slice.