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July 7, 2020, 4:35 p.m. EDT

The latest sign of a stock market bubble: Small companies claiming to disrupt large industries

Investors can’t get enough of insurance startup Lemonade, which is tiny and unprofitable

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By Nigam Arora


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The stock market is complex. Many investors are having difficulty making buying and selling decisions lately.

We can gain an insight by reviewing mobile-based insurance startup Lemonade /zigman2/quotes/219257798/composite LMND -2.71% , which is the best IPO of 2020. It went public last week.

Let’s first build the foundation for this topic 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 +0.26% , which tracks the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.17% .

Note the following:

• The chart shows the latest buying in the stock market, propelled by Chinese euphoria. The Chinese government signaled that it is a good time to foster a bull market in stocks. Of course, Chinese investors complied, running up the Shanghai Composite Index 5.7% in its biggest gain since 2015.

• In round robin buying, European investors followed the Chinese, and the momentum filtered through to the U.S.

• The chart shows that before the great recession of 2008, the Federal Reserve’s balance sheet stood at $0.87 trillion.

• The chart shows that in March 2009, when a major Arora buy signal was given, the Fed’s balance sheet stood at $2.08 trillion. With the benefit of hindsight, this also turned out to be the start of the long bull market.

• The chart shows Arora buy signals and calls for the Dow Jones Industrial Average to reach 30,000 points. From 2012 to this point in time, the majority of the rise in the stock market is attributable to the rise in the Fed’s balance sheet and lower interest rates. Please see “Here’s the case for Dow 30,000 in Trump’s first term.”

• Even though Joe Biden outpolls Donald Trump, it is too early to call the election. Investors should consider various scenarios.

• After Trump’s election, a big part of the rise in the stock market is attributable to the rise in the Fed’s balance sheet, tax cuts and reduced regulation.

• If Biden gets elected, he is committed to taking back most of Trump’s tax cuts and adding regulations. In theory, a large part of the gains in the stock market should disappear if Biden does what he says.

• The chart shows that the stock market touched the “mother of all support zones” on the coronavirus scare and then rebounded strongly. The main force behind the rebound has been the Fed’s expanding balance sheet and the government borrowing for stimulus programs. The chart shows that the Fed’s balance sheet is about $7 trillion today — on its way to $10 trillion.

/zigman2/quotes/219257798/composite
US : U.S.: NYSE
$ 66.84
-1.86 -2.71%
Volume: 656,975
Aug. 7, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$3.67 billion
Rev. per Employee
N/A
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/zigman2/quotes/208954582/composite
US : U.S.: NYSE Arca
$ 274.62
+0.72 +0.26%
Volume: 2.31M
Aug. 7, 2020 4:00p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,433.48
+46.50 +0.17%
Volume: 324.93M
Aug. 7, 2020 5:10p
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