By Nigam Arora
While history does not always repeat, prudent investors should still be students of it. Something has happened now that should be understood in the right light.
When it happened last, many investors lost about half the value of their portfolio. It was a common joke that 401(k)s had become 201(k)s. Let’s explore the issue with the help of two charts.
Please click here for a chart showing the yield curve.
Please click here for an annotated chart of S&P 500 ETF /zigman2/quotes/209901640/composite SPY +3.18% . Even though many investors focus on the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +2.68% , it is better to use the S&P 500 or Nasdaq 100 ETF /zigman2/quotes/208575548/composite QQQ +3.43% . For the sake of transparency, this is the same chart that was previously published without any changes.
Note the following:
• The white vertical areas in the first chart show recessions.
• During the last recession shown on the first chart, most investors lost about half of the value of their portfolios.
• The first chart shows that the yield curve has fallen to the lowest level since the last recession.
• The first chart shows that the fall in the yield curve has been followed by a recession.
• The second chart shows that The Arora Report gave four signals before the drop in the stock market.
• The four signals include short-selling Nasdaq 100 ETF or buying leveraged inverse Nasdaq 100 ETF /zigman2/quotes/202448809/composite SQQQ -10.27% , which goes up when the market goes down; increasing hedges to protect portfolios; taking profits on select ETF positions in our ZYX Global portfolio; and taking profits on China ETF /zigman2/quotes/205950053/composite ASHR +1.67% in our ZYX Emerging portfolio.
• Please click here for an intraday chart of S&P 500 ETF, which was published when the stock market was staging a strong rally. For the sake of transparency, this is the same chart that was published without any changes. When the stock market was rallying, we wrote: “The chart shows a key reversal. This is positive and, in traditional technical analysis, it means a rally is ahead. The chart shows that the VUD indicator stayed mostly orange during the strong rally from the lows. The VUD indicator is the most sensitive measure of net supply and demand in real time. The indicator staying mostly orange during the strong rally indicates that there was more supply of stocks than the demand for stocks. The market rose because buyers were significantly more aggressive than the sellers. The behavior shown on the first chart of a key reversal accompanied by a negative VUD indicator means that, more likely than not, a subsequent rally may fail.”
• The foregoing call was proven spot on, showing the power of the VUD indicator. The rally has failed as of this writing.
• The last time the yield curve was hitting lows, The Arora Report portfolios were 100% protected with cash and hedges. In addition, we were aggressively short-selling and giving signals to buy inverse ETFs for those who could not short. When most investors lost about half of their portfolio values, The Arora Report subscribers generated significant positive returns.