By Nigam Arora
U.S. President Donald Trump and Chinese President Xi Jinping have declared a trade truce. And stock market bulls are encouraged. So this is a good time for prudent investors to look ahead and plan.
Before I discuss a potential plan, let’s start with a chart. Please click here for an annotated chart of the SPDR Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA -0.11% . For complete transparency, this chart is unchanged from the prior publication. Similar conclusions can be drawn from the charts of SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY +0.34% and Invesco QQQ Trust /zigman2/quotes/208575548/composite QQQ +0.20% , which tracks the Nasdaq-100 Index /zigman2/quotes/210598364/realtime NDX +0.25% :
• The chart shows the first target for the Dow Jones Industrial Average of 29,000.
• The chart shows the second target for the Dow Jones Industrial Average of 32,000.
• The chart shows the Arora buy signal.
• The move up is not likely to be in a straight line, notwithstanding the euphoria after the trade truce.
• The stock market is assuming that a good trade deal is ahead.
• The stock market is also assuming aggressive interest-rate cuts by the Federal Reserve.
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A good deal is unlikely
After having studied the reporting related to the trade truce, I think there is no indication that China is willing to budge on its long-term goals. Here are the key points:
• The trade truce gives China more time.
• China will use this time to reduce its dependence on the United States. As an example, China is likely to focus on semiconductors that are now dominated by American companies such as Qualcomm /zigman2/quotes/206679220/composite QCOM +0.39% , Advanced Micro Devices /zigman2/quotes/208144392/composite AMD +3.20% , Micron Technology /zigman2/quotes/205710729/composite MU -2.81% and Applied Materials /zigman2/quotes/209393259/composite AMAT -1.22% .
• After China becomes stronger, it will have less incentive to give in to U.S. demands.
• The U.S. presidential election date will draw closer.
• Trump will be faced with a decision to accept a bad trade deal and keep the U.S. economy humming or not having a trade deal, harming the U.S. economy just before the election.
• The stock market is myopic, as it is controlled by the momo (momentum) crowd these days.