The Justice Department has launched a broad anti-trust investigation into big technology companies.
A chart, below, shows that the probe has the potential to make the current rally precarious. Let’s examine the issue with the help of an annotated chart. Please click here for an annotated chart of S&P 500 ETF SPY, +0.02% which represents the S&P 500 Index SPX, +0.04%
Please note the following:
• As the chart shows, the stock market is consolidating just above a breakout point. This is not a hallmark of a strong rally. A strong rally would typically move farther after a breakout.
Please click here for an annotated chart of Dow Jones Industrial Average ETF DIA, -0.44% The chart shows measured targets for the Dow Jones Industrial Average DJIA, -0.46% to be 29,000 and 32,000 points. For the sake of full transparency, this chart is exactly the same without any changes from the prior publication.
• The chart shows RSI (relative strength index) divergence. This is a negative.
• The chart shows the Arora buy signal given on Christmas Eve, which has turned out to be the low and a good buying opportunity.
• The chart shows the rally is on low volume. This indicates lack of conviction.
• The rally is mainly driven by expectations of a Federal Reserve interest-rate cut and the momo (momentum) crowd. The smart money is, so far, not buying this rally.
• Four stocks that seem to be the target of the DOJ investigation are Big Tech stalwarts Facebook FB, -0.39% Amazon AMZN, -0.18% Apple AAPL, -0.45% and Google holding company Alphabet GOOG, -1.00% GOOGL, -0.96%
• The rally is already precarious. Since the big tech stocks are the market leaders, any negative impact on them has the potential to slow the rally or even kill it.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
What to do now
As I have written before, the debt bubble is getting bigger and will eventually burst. In our analysis at The Arora Report, Republicans and Democrats have just struck the worst budget deal in history. The national debt is likely to reach $35 trillion by 2030, but nobody cares. Many investors will get badly hurt. Think of it as a party where almost everybody is drunk and all the drunken people claim that nobody is drunk. I would suggest to investors that they enjoy the party but be aware of the risks ahead.
At The Arora Report, we’ve had defensive measures, such as proper allocations to cash and hedges. Moreover, portfolio selection is important to control risks.
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.