By Nigam Arora
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Fear over a further spread of the deadly coronavirus and expectations of a Democratic victory in the presidential election are two events that will affect the stock market.
First and foremost, I am politically agnostic. My sole job is to help investors. But President Trump’s rally in Tulsa, Okla., was underwhelming, following polls that showed Joe Biden with double-digit leads in some cases. More than three years ago I wrote: “Here’s the case for Dow 30,000 in Trump’s first term.”
The secret sauce to handle the stock market’s election and coronavirus fears is risk management. Let’s explore the issue with the help of a chart.
Chart
Please click here for an annotated chart of the Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA +0.79% , which tracks the Dow Jones Industrial Average.
Note the following:
• The chart shows that the stock market is in the support/resistance zone.
• The chart shows that RSI (relative strength index) is on a buy signal but is flattening.
• The combination of the previous two items indicates that the risk in the stock market is much higher than widely believed.
• Wall Street loves Trump. Now there is a fear that Biden will be elected. In our analysis at The Arora Report, it is simply too early to call the election.
• If Biden gets elected, at a minimum, expect corporate income tax rate to go up from 21% to 28% and perhaps higher.
• Take a look at the chart on the left side of the “mother of support zones.” A part of the rise in the stock market is due to higher corporate earnings, in part, due to lower taxes and less regulation.
• If Biden gets elected, expect earnings to take a hit of about 10%, not only due to higher taxes but to more regulation.
• The chart shows that due to the coronavirus, the stock market fell to the top band of the mother of support zones and then rallied strongly.
• The chart shows that 65% of the first leg of the rally was short squeeze-related. In practical terms it means that there is a lot of air under the market instead of solid support.
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