By Nigam Arora
President Trump is facing a conundrum. He watches the stock market carefully. An easy way for him to prop up the stock market is to enter into a soft trade deal with China and declare victory.
However, that is clearly not in the long-term national interest. If Trump stays true to the long-term national interest and there is no deal with China soon, the stock market will go down and Trump may not even get re-elected.
If Trump strikes a soft deal and gives up on the long-term national interest, the stock market will go up and Trump may get re-elected. Herein lies the conundrum.
The stock market is myopic and has become a short-term casino to some extent due to the momo (momentum) crowd. This is the present reality. You cannot change it. What should investors do? That is the key question. Let’s explore with the help of a chart.
Please click here for an annotated chart of S&P 500 ETF (PSE:SPY) . Similar conclusions can be drawn from charts of the Dow Jones Industrial Average (DOW:DJIA) , Nasdaq-100 ETF (NAS:QQQ) and the iShares Russell 2000 ETF (PSE:IWM) . Please note the following:
• The chart shows that the market is in the resistance zone.
• Volatility in the resistance zone is normal.
• The chart shows that the market has not decisively broken the down trendline.
• The chart shows the Arora signal to buy ETF SPY or leveraged S&P 500 ETF (PSE:SSO) which moves at twice pace of the S&P 500 Index (S&P:SPX) . This signal was given on Christmas Eve, which turned out to be the exact bottom.
• The chart shows that an overbought condition has been temporarily relieved and this potentially sets up the market for a rally after a brief pullback.
• The chart shows The Arora Report signal to take profits on the short-term trade.
• The chart shows the Arora signal to reduce cash and deploy it in the market on Christmas Eve. This was meant for individual stocks and ETFs that had fallen into the previously given buy zones independent of the short-term trade.
• The chart shows the signal to add a short-term hedge on this rally.
• Volume has stayed relatively low during the rally. This is a negative.
• The chart shows that on this rally, The Arora Report gave a signal to add a small short-term hedge.
• Our portfolios were up to 61% protected before the downdraft of late 2018.
• We took advantage of the market dip to add to positions.
• The chart shows the behavior of RSI (Relative Strength Index) is positive.
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What to do now
Investors ought to consider taking a nimble approach, as illustrated by the real-life foregoing example. The approach includes the following:
• Start with the notion that the markets owe you nothing. Many investors have been brainwashed into believing that they are entitled to a return if they buy and hold. Please see “Investors are forgetting that the stock market owes them nothing.”
• Stay invested in good long-term individual stocks and ETF positions, but adjust the overall amount invested based on market conditions, especially money flows. Please see “Here’s the most recent update on money flows in Nvidia, Apple and Amazon.”
• Deploy cash slowly when the market dips.
• Slowly raise more cash when the market rallies.
• Establish or add to hedges on rallies when hedges become cheap.
• Take profits on hedges on dips.
• Diversify by time frames. The chart above shows a good example of opportunistically starting a short-term position right at the bottom of the market and taking profits on this rally. With diversification by time frames, if trades do not work out in one time frame, other positions in a different time frame tend to work out — remember, markets fluctuate. This way, investors also are always in the mode of booking some profits while allowing long-term positions to run.
• Diversify by strategies. Please see “Here’s an evergreen strategy to make money in a volatile stock market.”
• This approach makes dreaded volatility your friend.
This is an evergreen approach that works under all market conditions. However, parameters need to be adjusted as market conditions change. Our consistent long-term track record in bull and bear markets has shown that this approach is far superior to just timing the market, or buying and holding.
In addition to the averages, investors ought to keep a close eye on market bellwethers and money flows in them. Popular tech stocks Apple (NAS:AAPL) , Facebook (NAS:FB) , Netflix (NAS:NFLX) and Amazon (NAS:AMZN) are still bellwethers. Other important bellwethers are exporters such as Caterpillar (NYS:CAT) and Boeing (NYS:BA) .
It is also important to keep an eye on banks such as J.P. Morgan Chase (NYS:JPM) and Bank of America (NYS:BAC) .
These days, oil is highly correlated to the stock market and often leads. Keep an eye on the United States Oil ETF (PSE:USO) , the Energy Select Sector SPDR ETF (PSE:XLE) and Continental Resources (NYS:CLR) .
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora 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.