By Nigam Arora
In my 30-plus years in the markets, I can safely say that most popular analysis methods do not work well. Still, I can attest that a combination of forward-looking macro analysis combined with a review of earnings projections works most of the time. In plain English: Look for change.
New fundamental and macro developments often leave the technicals of the market in the dust. And the new macro development is an aggressive timeline for tax reform by the Trump administration . This is a change from the prevailing wisdom. To fully understand the impact, let’s start with a chart.
Please click here to see an annotated chart of Dow Jones Industrial Average futures. It captures after-hours action and represents large, liquid stocks. Popular, broad-based ETFs such as S&P 500 ETF /zigman2/quotes/209901640/composite SPY -0.42% , Nasdaq 100 ETF /zigman2/quotes/208575548/composite QQQ +0.08% and small-cap ETF /zigman2/quotes/209961116/composite IWM -1.83% gapped up on the news.
The VUD indicator is the most sensitive measure of the net supply and demand in real time. There is net selling on the news. This indicates there are many non-believers in Trump’s aggressive timeline for tax reform. This is positive because when non-believers are converted later, there is potential fuel for the market to go higher.
Aggressive tax-reform timeline
The prevailing wisdom has been that the White House is bogged down and tax reform might not happen until much later. The news is that the White House has set an aggressive timeline to get tax reform done before the end of the year. The White House is calling for the legislation to be drafted by the end of this month. The White House will push for passage by the House by October and by the Senate by November.
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Earnings season is in full swing. So far with over half of the S&P 500 companies having reported earnings, over 70% are beating projections. Notable earnings to focus on now are Apple /zigman2/quotes/202934861/composite AAPL -0.06% , Cummins /zigman2/quotes/208385233/composite CMI -2.05% , Pfizer /zigman2/quotes/202877789/composite PFE -1.99% , Shopify /zigman2/quotes/209033712/composite SHOP +5.69% , Royal Caribbean /zigman2/quotes/208854639/composite RCL +4.43% , Illumina /zigman2/quotes/203509482/composite ILMN +2.21% and Community Health /zigman2/quotes/203657360/composite CYH -3.33% .
Growth in Europe
The eurozone economy grew by 0.6% (meeting the consensus) in the second quarter. This is good news and is helping stocks. If the trend of growth in Europe continues, that can propel the market higher. Economies across the globe are getting synchronized. Europe doing better increases the positive sentiment for the U.S. market. Furthermore, a large proportion of earnings of S&P 500 companies come from Europe. Take a look at how much money companies such as Microsoft /zigman2/quotes/207732364/composite MSFT +2.42% , Alphabet /zigman2/quotes/205453964/composite GOOG +1.61% /zigman2/quotes/202490156/composite GOOGL +1.85% and Facebook /zigman2/quotes/205064656/composite FB +1.43% are making from Europe. If you are interested in directly investing in Europe, ETFs of interest are /zigman2/quotes/200270338/composite VGK -0.72% , /zigman2/quotes/208576341/composite EZU -0.58% and /zigman2/quotes/207610016/composite FEZ -0.80% . To eliminate currency risk, investors may consider currency-hedged ETF /zigman2/quotes/207911216/composite HEDJ -1.27% .
Personal incomes and spending
The U.S. economy is about 70% consumer-based. For this reason, both personal spending and personal income carry a heavy weighting in the adaptive timing model ZYX Global Allocation that we use at The Arora Report. (It automatically changes with market conditions.)
June personal spending month-over-month came in at 0.1% (again, meeting the consensus). Personal income month-over-month was flat vs. 0.3% consensus.
Gold is seeing light selling by the “smart money” on up spikes. Selling by the smart money is containing the aggressive buying by the momo (momentum) crowd. It appears that thinking is that a successful tax reform will strengthen Trump and reduce pressure on him to do something about the Special Counsel Robert S. Mueller III. Please see “This is by far the biggest threat that Trump poses to the stock market.” ETFs of interest are gold ETF /zigman2/quotes/200593176/composite GLD -3.65% , silver ETF /zigman2/quotes/205744453/composite SLV -5.71% , gold miner ETF /zigman2/quotes/206399889/composite GDX -6.86% , junior gold miner ETF /zigman2/quotes/204075079/composite GDXJ -9.33% and leveraged miners ETFs /zigman2/quotes/204236046/composite DUST +20.95% and /zigman2/quotes/208908392/composite NUGT -21.96%
A short squeeze led oil to over $50 a barrel. As of this writing, the short squeeze seems to be easing and oil is moving back below $50. A tax reform will accelerate growth and increase demand for oil. ETFs of interest are oil ETF /zigman2/quotes/203483736/composite USO -3.37% , oil equities ETF /zigman2/quotes/206420077/composite XLE -0.09% , oil exploration ETF /zigman2/quotes/203527521/composite XOP +3.71% and oil services ETF /zigman2/quotes/207596637/composite OIH +2.16% .
The case for Dow 30,000
Finally, there is a reasonably strong case for Dow 30,000. For details please see “Trump’s tax plan sets the stage for Dow 30,000.”
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.
Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.