President Trump’s ban on supplying technology to Huawei, the Chinese telecom giant, is spreading beyond U.S. shores.
Companies in Europe and Japan are beginning to halt some shipments to Huawei. The reason is that the underlying technology is American technology. I will explain later in this column about the next shoe to drop in this trade war. Above all, investors ought to look at protecting their portfolios. Let’s explore with the help of a chart.
Chart
Please click here for an annotated chart of Nasdaq 100 ETF QQQ, -1.53% Similar conclusions can be drawn from the charts of the Dow Jones Industrial Average DJIA, -1.11% and S&P 500 ETF SPY, -1.22% Please note the following:
• As the chart shows, the support zone is nearby.
• For the bull market to sustain itself, there should be, at best, only a minor breach of the support zone shown on the chart.
• The way machines trade these days, unlike in the past, support zones are often broken, stops of those less knowledgeable are taken out and then the market bounces. This is a typical pattern. However, it does not mean that the pattern is repeated every time.
• The chart shows the Arora buy signal given on Christmas Eve, which turned out to be the low of the cycle.
• The chart shows the Arora signal to short-sell QQQ or buy inverse ETF PSQ, +1.61%
• The chart shows a failure point for the rally.
• RSI (relative strength index) shows a weak bounce from the oversold condition.
• The chart shows the Arora call to raise cash and hedges on May 6 near the top.
Ivan Martchev: China has a silver bullet in its trade-war arsenal
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Stocks to watch for clues
Among popular large-cap stocks, there is significant risk to Apple AAPL, -1.71% because of its China exposure. Google GOOG, -0.92% GOOGL, -0.91% Amazon AMZN, -2.38% and Facebook FB, -2.40% do not have material exposure to China.
Among semiconductor stocks, Qorvo QRVO, +0.76% Skyworks Solutions SWKS, -0.12% and Micron Technology MU, -2.62% have significant exposure to Huawei. Qualcomm QCOM, -1.52% also has significant exposure, but the driving force of the stock will be the appeal of the antitrust decision against Qualcomm and potential support from those in the Trump administration who are concerned with national-security implications. Investors should also keep an eye on shares of Intel INTC, +1.20% AMD AMD, -3.83% and Applied Materials AMAT, -1.36%
The next shoe to drop
Chinese companies have been cornering the market for surveillance equipment. Trump is considering a new ban on five Chinese companies. Among the targets, stocks of Hikvision and Dahua plunged on the news. These are not your father’s surveillance-equipment companies. They are using new technologies of facial recognition, gait recognition, speech monitoring and artificial intelligence. These companies are setting up networks to track people by their facial features anywhere in the country.
These companies also are dominating the globe and lately seem to have been spending a ton of money to expand in the United States.
In our analysis, Trump is on the right track. However, the stock market is short-sighted and may react badly to new bans.
Keep an eye on Ambarella AMBA, -5.08% because it is a supplier to Chinese surveillance companies.
Portfolio protection
In 2008, when most investors lost half the value of their portfolios, The Arora Report produced a return of 45.9%. This was accomplished with inverse ETFs. Of course, we produced higher return for those who could short-sell. The credit goes to the adaptive ZYX Asset Allocation model with inputs in 10 categories. In plain English, adaptive means a model that changes itself with market conditions. The chart linked above shows when we increased portfolio protection in the month of May and a sell signal on technology stocks. All investors ought to consider taking appropriate measures to protect their portfolios.
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.