This article is in response to emails I’m getting from investors who are trying hard not to panic in the face of fear mongering related to the inverted yield curve and economic data.
What’s important to note is that investors ought to be aware that a potential scenario for new highs in the stock market is developing.
The foundation of traditional technical analysis is that all known information is reflected in the chart of the stock market. There are strong reasons to disagree with that hypothesis; nonetheless, there is significant merit to look at the charts even for those who do not believe in technical analysis. This is especially true at this time, when there is a dichotomy between fear mongering on one hand and bullishness on the other. Let us explore with the help of a chart.
Read: Why an inverted yield curve doesn’t mean investors should immediately sell stocks
Chart
Please click here for an annotated chart of S&P 500 ETF SPY, +0.75% For the sake of full transparency, this is the same chart that was previously published without any changes. Please note the following:
• The leading economic indicators from across the globe are a cause for a big concern for the stock market.
• The inverted yield curve merits careful watching.
• Considering that the bull market is long in the tooth, concern about the stock market is justified.
• On the positive side, central banks across the world are pursuing monetary policies that should put a floor under the stock market.
• A situation is developing that may prompt the Federal Reserve to cut interest rates.
• Under that scenario, as the rumors of a possible Fed rate cut spreads, a short squeeze can easily develop. If a short squeeze develops, the stock market can penetrate the resistance shown on the chart and go to new highs.
• The chart shows the support zone.
• From a longer-term perspective, until the support zone shown on the chart is penetrated, there is not a strong bear case for the stock market from a technical perspective.
• Semiconductor stocks such as Micron Technology MU, -0.57% AMD AMD, -1.08% Intel INTC, +1.25% and Applied Materials AMAT, +0.58% may be a combined leading indicator at this time.
• Semiconductor stocks are ignoring poor fundamental data. This behavior often leads to a new “up” leg. A new up leg in semiconductor stocks may be the start of a push for the stock market to new highs.
• Large-cap tech stocks such as Apple AAPL, -1.03% Amazon AMZN, +0.54% Facebook FB, +0.84% and Microsoft MSFT, +0.21% are also acting like they want to go higher and take the stock market to new highs.
• Speculative sentiment is there to support a march by the stock market to new highs. This is evident from marijuana stocks. For example, New Jersey canceled a vote for legalization of marijuana due to lack of support from the lawmakers in spite of massive lobbying. Did it hit marijuana stocks in a big way? No. There have been poor earnings from the likes of Cronos CRON, -1.41% Canopy Growth CGC, +1.06% Aurora Cannabis ACB, -0.97% and Tilray TLRY, -1.22% In theory these stocks should have fallen, but they have not. This is an indication of speculative sentiment that extends beyond marijuana stocks.
• For more analysis on this chart, please see “Trump’s Mueller victory, the yield curve and slowing growth — here’s how to navigate the stock market.”
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What to do now
Price action is contrary to the economic indicators. Under these circumstances, it is advisable to stay the course in a strategic sense but be tactical. In a strategic sense, The Arora Report recommendation is to hold good long-term positions but also hold a fair amount of cash and hedges.
In a tactical sense, consider diversifying with short-term trades and focusing on evergreen strategies as opportunities arise. Please see “Here’s an evergreen strategy to make money in a volatile stock market.” Also consider trimming positions at the edges on rips and adding on dips.
Caution
In view of the foregoing, it is important to not get stuck in a bullish or a bearish point of view. Consider being receptive to new scenarios as they develop based on new incoming data.
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.