By Nigam Arora
Courtesy Everett Collection
The coronavirus is spreading. The stock market is under pressure. Investors are reacting — badly.
The No. 1 mistake investors are making now in the wake of coronavirus has to do with their artificial construct of the true nature of the stock market. Reality and this construct simply do not work well together.
Before discussing this mistake, let’s first build the necessary background so it can be fully understood.
For the sake of full transparency, both charts were previously published and no changes have been made.
Note the following:
• The first chart shows the Arora buy signal on Christmas Eve 2018. At that time, the stock market had fallen about 20%. Now with hindsight, Christmas Eve 2018 turned out to be the low before a major rise in the stock market. However, on that day, panic was setting in, and most analysts were giving sell signals.
• The second chart drills down in detail on the subject that is most important to investors right now.
• The second chart shows that when the market first fell, the Arora call was that the market was not likely at the low. At that time, the stock market had fallen by a certain percentage that was prompting many investors to buy stocks.
• After the first low, the stock market staged a rally. As shown on the second chart, when it fell again, many investors who missed buying the previous time were buying again because the stock market had fallen by a certain percentage.
• The second chart shows that at the time of the second decline in the stock market, the Arora call was that it was not the likely low point.
• Subsequently, there was a significant further fall in the stock market that led to the Arora buy signal at the very low.
• The first chart shows three support zones. For more details of these support zones and other important items related to the first chart, please see “Buffett is bullish on stocks but says the market can drop 50% — is he wrong?”
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The artificial construct
The artificial construct that investors employ is the concept of percentages. Recently, investors bought when the market fell 5%. Some held out until their favorite stocks, such as AMD /zigman2/quotes/208144392/composite AMD +7.45% and Micron Technology /zigman2/quotes/205710729/composite MU +1.51% , fell 7%, only to find them drop much further. Some now aim to buy at a 10% decrease in the stock market.