By Nigam Arora
CMT / Courtesy Everett Collection
Investors’ goal is to make money consistently in all market conditions — amid rampant speculation, a good or bad economy, a pandemic, varied Federal Reserve policies.
It’s time for investors who have made money in the stock market over the past decade to say thank you to the Fed. Now comes the hard part.
At Wednesday’s press conference, Fed Chairman Jerome Powell was adamant in that, irrespective of bubbles in the stock market or good economic data, the Fed is set on a course to print money and keep interest rates at zero through 2022. Here is the most striking statement: “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.” Notice the double emphasis on “thinking about.”
It’s a big milestone. Finally the tutoring of the Fed, supposedly an independent body, by politicians is complete — it’s all about “not thinking” — not thinking about how to ultimately unwind the massive balance sheet the Fed is building and the massive national debt that politicians are happy to undertake.
What does it mean for stock market investors? In theory, it will lead to rampant stock market speculation in the short term and a massive crash down the road. In the very short term, the stock market is very overbought, and overbought markets tend to be vulnerable to the downside.
Further, we have been sharing with you that proprietary sentiment indicators at The Arora Report have been in the extreme zone. Sentiment is a contrary indicator at extremes. In plain English, this means that when sentiment is extremely bullish, it’s a sell signal.
Let’s explore this idea further with the help of a chart.
Please click here for an annotated chart of the Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA +1.03% , which tracks the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.05% .
Note the following:
• First and foremost, everything that affects the markets, including macro-economic data, fundamentals, sentiment, risk appetite, short squeezes as well as monetary and fiscal policies, are reflected in the charts. It takes years of observation, hard work and dedication to learn to correctly read charts. The naysayers simply have not spent the time and effort needed to benefit from charts.
• Start from the left-hand side of the chart. The chart shows that in 2007, before the 2008 Great Recession, the Federal Reserve balance sheet was $0.87 trillion.
• The chart shows that in March 2009, an aggressive buy signal was given by The Arora Report, which turned out to be the start of the great bull market. The Fed balance sheet was $2.08 trillion.
• The chart shows that, by 2012, the Fed balance sheet had ballooned to $2.8 trillion.
• The chart shows that, by 2018, the Fed balance sheet had exploded to $4.4 trillion.