When the stock market has a bad day, gurus make dire predictions, such as the stock market plunging 40%. On the other hand, when the stock market has a good day, they make rosy predictions.
Both bullish and bearish gurus always put on a confident face. Do you find these contradictions helpful in an actionable way?
You may be familiar with Arora’s Second Law of Investing: No one knows with certainty what is going to happen next.
There are always cross-currents in the stock market. Let’s explore how to navigate the stock market with the help of a chart.
Chart
Please click here for an annotated chart of S&P 500 SPY, -0.08% Somewhat different conclusions can be drawn from the charts of the Dow Jones Industrial Average DJIA, +0.06% Nasdaq 100 ETF QQQ, -0.19% and small-cap ETF IWM, +0.44% Please note the following:
• Irrespective of your political ideology, the Mueller report is a win for Trump and for investors.
• The Arora Report monitors leading economic indicators from 23 countries. We have been warning investors since last year that global growth is slowing. Now Wall Street is catching on.
• The yield curve has barely inverted. Contrary to gloom-and-doom projections based on the yield curve, in our analysis at The Arora Report, there are special factors related to central banks that are at play. For this reason, the historical precedents may not apply. Investors should keep a close watch but not panic.
• The chart shows the Arora call that the smart money was selling aggressively into the strength before the market fell. The advantage of monitoring smart money flows is on vivid display here.
• The chart shows the Arora buy signal that was given on Christmas Eve, which turned out to be the low.
• The chart shows a technical breakout.
• The chart shows a potential failure of the breakout on heavy volume and falling RSI (relative strength index). This is a negative pattern. However, the situation needs to be closely monitored as the bear case from a technical perspective will not be fully established unless the market falls through the support zone shown on the chart.
• The chart shows that The Arora Report correctly identified prior lows as “not likely lows.”
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.
‘Buy and hold’ passive investors
Some investors have short memories. The long bull market has emboldened and made passive “buy and hold” investors overconfident. If you believe that blindly sending money to index funds is a successful strategy, please read “Here’s why lessons learned from the 10-year bull market in stocks could hurt you.”
What to do now
The market is at an inflection point. Investors ought to consider the following:
• Watch the price action in the chart of the S&P 500 SPX, -0.08%
• Watch momo (momentum) crowd and smart money flows in the stock market. Please read “The ‘smart money’ prefers Alibaba over Amazon, Intel over AMD, and Google over Apple.”
• Watch how Apple’s AAPL, -1.21% stock responds to its video-streaming announcement.
• Watch how Netflix’s NFLX, +1.45% stock responds to Apple’s video-streaming announcement.
• Tesla TSLA, -1.55% has been popular among investors willing to take high risks. As of this writing, the stock of Tesla appears to be breaking down. Watch if the stock of Tesla recovers.
• Semiconductor stocks have been hot even though the fundamental data do not support the current rally. Pay special attention to smart money flows in the stocks of Micron Technology MU, -2.57% AMD AMD, -1.52% Intel INTC, -0.90% and Lam Research LRCX, -0.20%
• Pay attention to smart money flows in stocks such as Amazon AMZN, +0.54% Facebook FB, +1.19% Microsoft MSFT, +0.52% and Alphabet GOOG, -1.04% GOOGL, -0.85%
• Pay attention to any new statements from the Federal Reserve regarding their purchase of Treasuries. The Fed may attempt to modify the yield curve.
• Pay attention to leading economic indicators across the globe, not just in the United States.
• Keep a handle on the speculative sentiment by watching marijuana stocks such as Canopy Growth CGC, -0.34% Aurora Cannabis ACB, +2.44% Cronos CRON, +6.76% and Tilray TLRY, +0.92%
What do you do with the foregoing information? At The Arora Report we use it, along with ZYX Asset Allocation Model, to review cash levels, hedge levels and which stocks or ETFs to buy, hold or sell. Investors ought to do the same. This is also a good time to pay attention to evergreen strategies. Please see “Here’s an evergreen strategy to make money in a volatile stock market.”
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.