By Nigam Arora
Many investors are getting excited about the Brexit deal.
Some excitement is warranted because it took years of wrangling for the U.K. and the European Union to reach a deal at the last minute. However, all is not clear. Northern Ireland’s Democratic Unionist Party does not support the deal. The opposition Labour Party is calling for the agreement to be rejected. As of this writing, there is no guarantee that the deal will be approved by the U.K. Parliament.
Investors ought to know the most important thing about Brexit.
Note the following:
• The chart shows the trend line for the U.S. stock market.
• The chart shows the Arora call that Brexit might happen. This call came at a time when Wall Street consensus was that Brexit would not happen.
• Wall Street was proven wrong when U.K. residents voted for Brexit.
• Wall Street’s call was that stocks would fall. The Arora Report’s call was that stocks would rise and the dip was a buying opportunity.
• The European Union is the largest trading partner for the U.K. In 2017, 53% of all U.K. imports were from the EU and 44% of all U.K. exports went to the EU.
• The U.K. is a big trading nation. But investors ought to have the perspective that the U.K. is no longer the giant it once was in terms of its economic impact on the world. The United States’ gross domestic product (GDP) is about $21 trillion, China’s GDP is about $15 trillion and the U.K.’s is about $3 trillion. Still, London is the center of international banking.
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The all-important trend line
The most important point for investors is the trend line shown on the chart. The stock market did not fall below the trend line when Brexit was first announced. During all the wrangling over the years, the stock market did not fall due to Brexit issues. Now, isn’t it unreasonable to assume that the stock market would rise because of the Brexit deal?
The Brexit deal is positive and certainly creates positive sentiment. However, in the end, it is not material for most investors.
There may be certain isolated opportunities in U.K. stocks and our plan is to take advantage of such opportunities.
Instead of Brexit, investors ought to focus on price action in Netflix /zigman2/quotes/202353025/composite NFLX -0.41% after the company reported third-quarter earnings. Overall, Netflix earnings are showing cracks. If the same earnings were reported almost any other time in the past, Netflix’s stock would have fallen. As of this writing, Netflix’s stock has jumped because earnings and subscriber numbers were better than the worst fears. Please see “Momentum investors are now buying shares of Apple, Amazon and Netflix.”
The smart money (professional investors) is not buying into the Netflix stock bounce so far. It is the momo (momentum) crowd and a short-squeeze causing the buying in Netflix stock.
Investors should also keep their eyes on the price action in mega-cap stocks such as Apple /zigman2/quotes/202934861/composite AAPL +1.45% , Amazon /zigman2/quotes/210331248/composite AMZN +0.67% , Facebook /zigman2/quotes/205064656/composite FB -0.14% and Alphabet /zigman2/quotes/205453964/composite GOOG +0.46% /zigman2/quotes/202490156/composite GOOGL +0.36% .
Semiconductor stocks are often an early indicator in a change in direction for the stock market. Popular semiconductor stocks such as Intel /zigman2/quotes/203649727/composite INTC +1.47% , AMD /zigman2/quotes/208144392/composite AMD +3.53% , Micron Technology /zigman2/quotes/205710729/composite MU +3.88% and Nvidia /zigman2/quotes/200467500/composite NVDA +6.11% are showing resilience.
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.