By Nigam Arora
There’s a lot converging on investors today. Let’s sort it out.
All signs were there for the coronavirus to move from a phase of containment to mitigation. Still, people have been surprised.
There was a genuine surprise that Russia would declare war on American shale producers by failing to go along with OPEC production cuts. An even bigger surprise has been Saudi Arabia declaring war on Russia by increasing production and giving massive discounts on oil.
What’s gotten lost: Yes Bank, one of the largest private banks in India, has failed . Bank is in the U.S. are generally in good shape, but expect more bank failures overseas. Even some smaller U.S. banks highly exposed to oil and gas may come under stress.
I am paraphrasing the question I am being asked most often: “Should I buy or should I sell?”
To answer the question, let’s build the necessary background with the help of two charts.
Please click here for a long-term monthly chart of the Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA -0.02% , which tracks the Dow /zigman2/quotes/210598065/realtime DJIA -0.07% . For the sake of transparency, this chart was previously published, and no changes have been made.
Note the following:
• The first chart is an updated version of a chart that was previously published. For details, please see “A watershed moment is on the way if stocks can’t hold this level.”
• The first chart shows that the stock market gapped down after the “programmed selling” point shown on the chart was violated in futures trading.
• The first chart shows that, as of this writing, the lower band of the upper support zone has not been decisively broken.
• A proprietary indicator that has served The Arora Report well over the years is the “hate mail indicator.” The indicator is derived from the hate messages I get in response to my writing. This indicator shows that there is still too much complacency among investors.
Recently when I wrote to put protections on rallies, I got a lot of hate mail. Please see “As the stock market rallies, put protections on your investing portfolio.” When I wrote that the No. 1 mistake investors were making was buying because the market was down a certain percentage such as 5%, I got a lot of hate mail. Please see “This is the No. 1 mistake investors are making now — here’s how to avoid it.”
The amount of the hate mail has been higher compared to when I wrote back in January that an external event could stunt U.S. stocks at a time when coronavirus news was just beginning to surface and the stock market was hitting new highs. Please see “How an external event could stunt U.S. stocks.”
The sum total is that, at this time, investors are buying more than what is justifiable based on both technicals and fundamentals. Investors are still over-invested. This behavior may lead to a short-term rally, but it may not be sustainable.
• The first chart shows that Arora long-term portfolios were up to 57% protected near the top of the market. Before the fall last Friday, they were up to 72% protected.
• The chart shows Arora signals to buy inverse leveraged Nasdaq 100 ETF /zigman2/quotes/202448809/composite SQQQ -4.07% or short-sell Nasdaq 100 ETF /zigman2/quotes/208575548/composite QQQ +1.47% for a short-term trade near the top of the market.
• The first chart shows the second major support zone. Unless there is good news — and, yes, there can be good news — there is a fair probability of the stock market falling to the second major support zone shown on the chart.
• The first chart shows how far the stock market has come since the Arora buy signal given in 2009 to aggressively buy stocks, which has turned out to be the start of the bull market.
• The first chart shows a rising trendline until Donald Trump’s election. There is a risk of the stock market ultimately pulling back to this trendline.
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.