By Nigam Arora
What a difference time makes.
When I gave a “buy” signal on Donald Trump’s election at a time when many were predicting a big stock market drop, it was at first met with incredulity. When I called for a high-probability scenario of the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.44% hitting 30,000 points in Trump’s first term, I received a ton of hate mail. I have subsequently repeated Dow 30,000 in Trump’s first term several times. (Please see “Here’s the case for Dow 30,000 in Trump’s first term.”)
Now, a few years later, Dow 30,000 calls are commonplace. So what’s next for the stock market? Let’s examine the issue with the help of a chart.
Note the following:
• It’s a weekly chart.
• The chart shows the first measured target of 30,000 and the next target for the stock market above 32,000.
• The stock market often shows symmetry, as shown on the chart.
• The weekly chart shows that the relative strength index (RSI) is overbought, but there is room to run. A shallow pullback could happen, as RSI on a daily chart is very overbought.
• The chart shows that the volume is low. This indicates a lack of conviction in the rally.
• Paradoxically, low volume can lead to an explosive rally because of the upcoming year-end. Money managers who are lagging the stock market may end up throwing caution to the wind and aggressively buying shares. Investors may want to keep a close eye on large-cap tech stocks such as Apple /zigman2/quotes/202934861/composite AAPL +0.25% , Facebook /zigman2/quotes/205064656/composite FB +0.23% , Amazon /zigman2/quotes/210331248/composite AMZN +0.55% and Microsoft /zigman2/quotes/207732364/composite MSFT -0.30% . It’s also important to monitor semiconductor stocks such as Intel /zigman2/quotes/203649727/composite INTC +1.90% , AMD /zigman2/quotes/208144392/composite AMD -2.40% , Applied Materials /zigman2/quotes/209393259/composite AMAT -1.42% and Micron Technology /zigman2/quotes/205710729/composite MU +1.44% . Please see “Everyone is bullish on stocks all of a sudden — here’s why you shouldn’t be.”
• If performance chasing does not start, the reverse may happen as money managers may attempt to lock in gains. Notice the pullback on Disney /zigman2/quotes/203410047/composite DIS +2.17% and Walmart /zigman2/quotes/207374728/composite WMT +2.29% stocks after good news. Also see “Walmart’s stock is now outperforming Amazon’s — here’s how it happened.”
• There are early indications that the Trump impeachment process in Congress is energizing his base.
• Trump is very sensitive to appeasing his base. As an example, he has been passionately against vaping and had been looking at a ban on flavored e-cigarettes. After realizing that vaping is popular among his base, Trump appears to be retreating from a strong ban on flavored e-cigarettes. There are reports that no ban may happen.
• Wall Street is already assuming that Trump will get re-elected. As Wall Street notices the energy in Trump’s base, they may run stocks higher. Before Trump’s election, Wall Street had almost unanimously believed that Hillary Clinton would be the next president. Of course, you may recall that The Arora Report never bought into the Hillary Clinton presidency and correctly called Trump’s election.
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What does it all mean?
As positive as the foregoing may sound, make no mistake that this market is driven by the momo (momentum) crowd. In our analysis at The Arora Report, a majority of the buying is happening because the market is simply going up and not because of earnings or economic indicators. Therefore, it is important to follow a proven adaptive model such as the ZYX Asset Allocation Model with inputs in 10 categories. Right now the model is calling for holding a fair amount of cash and hedges, and staying cautiously bullish. Keep in mind that the momo crowd is fickle. If momentum weakens, a drop in the stock market could be swift.
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.