By Nigam Arora
Unemployment continues to rise in the U.S. amid a government-mandated shutdown of the economy.
Initial jobless claims for the week came in at 4.4 million Thursday, pushing the total above 26 million and producing an estimated 15% unemployment rate.
The question I’m being asked most is: “Who is buying this stock market?”
Many investors believe the stock market has gone bonkers, saying it has become totally divorced from the reality on Main Street. I agree that the stock market isn’t reflecting the economy. There are many reasons for it, and the details will be the subject of a future column.
Let’s discuss who is buying this stock market with the help of a chart.
Please click here for annotated chart of the Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA +2.10% , which tracks the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +2.05% .
Note the following:
1. The whole system is set up for investors to buy stocks and keep them in stocks. For details, please see “Wall Street wants you to believe everything is peachy.”
2. The chart shows that, until last week, about 65% of the rise in the stock market was short-squeeze-related. There are several elements to this increase that all investors should become familiar with. These elements are described in detail in “The force that’s propelled the stock market rally will exhaust itself this week.”
3. Start out with the premise that even if unemployment reaches 20%, then 80% of the people are still employed.
4. A majority of the people who are losing their jobs earn less than average and work in service sectors. They typically do not invest in the stock market, as they generally do not have the resources to invest.
5. People who generally invest in the stock market still have their jobs. They are still contributing to their 401(k)s, which is creating buying.
6. The chart shows a sharp drop that touched the upper band of the “mother of support zones” and a quick rebound to the bottom band of the resistance zone. History tells us that quick market moves do not change the behavior of investors, money managers and institutions alike.
7. History tells us that it takes prolonged pain to change human behavior. In the coronavirus crisis, the pain has not been prolonged for stock market investors.
8. There is considerable anecdotal evidence that prudent investors have become very cautious, but they represent only a small part of the total.
9. Some prudent investors including money managers often have no choice but to hold their nose and buy stocks in a rising market. Many money managers are expected to beat their benchmark indexes. For them, falling too far behind is career suicide.
10. Many investors feel they have legitimate reasons to buy — monetary stimulus, fiscal stimulus, pent-up demand and a potential cure and vaccine for the coronavirus.
11. In general, when a bad jobs report comes out, investors buy because they believe the overhang has been lifted.
12. The benchmark stock market index S&P 500 /zigman2/quotes/210599714/realtime SPX +1.81% is concentrated in Microsoft /zigman2/quotes/207732364/composite MSFT +2.90% , Apple /zigman2/quotes/202934861/composite AAPL +3.45% , Amazon /zigman2/quotes/210331248/composite AMZN -0.40% and Facebook /zigman2/quotes/205064656/composite FB +0.89% . Investors believe these stocks are safe, along with semiconductor stocks such as AMD /zigman2/quotes/208144392/composite AMD +1.26% , Intel /zigman2/quotes/203649727/composite INTC +0.77% and Micron Technology /zigman2/quotes/205710729/composite MU +0.77% . Investors have blinders on and refuse to see the risks in these stocks.
13. There is a strike of sellers.
Answers to your questions
Answers to some of your questions are in my previous writings. You can access them here.
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.