There are new danger signals from bonds and gold for stock market bulls. Prudent investors would be wise to understand them.
Let’s explore the issue with the help of two charts.
Charts
Please click here for an annotated chart of iShares 20+ Year Treasury Bond ETF TLT, +0.04%.
Please click here for an annotated chart of S&P 500 ETF SPY, +0.06%. For the sake of transparency, this chart was previously published and no changes have been made.
Note the following:
• The first chart shows an “up” move in bonds has become a parabolic up move.
• From the first chart, pay attention to the big up move shown by the last bar.
• As the first chart shows, the parabolic up move in bonds is subsequent to a steady, strong up move as shown by the trend line on the chart.
• Prudent investors ought to note from the first chart that, so far, there have been four extreme overbought conditions in bonds as shown by RSI (relative strength index) approaching 100.
• Typically when RSI approaches 100, a significant pullback in price is expected unless it is a strong up-trending market.
• Note from the first chart that there have not been any material pullbacks in bond prices after RSI approached 100 the first three times. That augured for a parabolic move up, and that is exactly what is happening now.
• Note from the first chart that the parabolic move up is on heavy volume.
• Bond prices move inverse to their yields. The parabolic up move in bonds means a parabolic down move in yields.
• The second chart shows that The Arora Report gave four signals before the drop in the stock market.
• The four signals include short-selling Nasdaq 100 ETF QQQ, +0.54% or buying leveraged-inverse Nasdaq 100 ETF SQQQ, -1.30%, which goes up when the market goes down; increasing hedges to protect portfolios; taking profits on select ETF positions in our ZYX Global portfolio; and taking profits on a China ETF ASHR, +0.08% in our ZYX Emerging portfolio. ETFs on which profits were taken include semiconductor equities ETF SMH, +0.55%, technology equities ETF IYW, +0.48%, China internet equities ETF KWEB, +0.67%, frontier markets ETF FM, +0.58%, small-cap Japan equities ETF DXJS, +0.04% and large-cap currency-hedged Japan equities ETF HEWJ, +0.38%.
• We previously shared with you that RSI on the second chart was oversold, as indicated by RSI falling below the yellow line on the second chart. We wrote that this indicated at least a short-term bounce. This is exactly what happened; the stock market had a bounce of over 300 Dow Jones Industrial Average DJIA, -0.09% points. For details, please see “The most important indicator in the stock market today is support zones.” Now a drop is expected, as of this writing, at least for the very short term.
• For a chart showing the third and fourth support zones, please click here. For the sake of transparency, this chart was published before the stock market fell.
• Semiconductor stocks are sensitive to China issues and have often given advanced indications. For this reason, it makes sense to watch support zones in AMD AMD, +1.14%, Micron MU, -2.04%, Intel INTC, -0.49% and Nvidia NVDA, +1.01%.
• Investors ought to watch support zones for Apple AAPL, +1.04%, Facebook FB, +0.35%, Amazon AMZN, +0.31% and Microsoft MSFT, +0.44% because those stocks have been the market leaders.
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.
Rate cuts
Rate-cut fever is spreading. There have been greater-than-expected interest-rate cuts in India and New Zealand. There was a surprise rate cut in Thailand.
Since stocks compete with bonds, up to a certain point, lower rates are good for stocks. This exact point is indicated on the first chart, linked above, before the start of the parabolic move. A parabolic move in bonds is indicating an upcoming global recession or that something else is wrong. This is a bad signal for stocks.
As of this writing, gold has broken resistance at $1,500 an ounce. I will discuss this more in a future article. This is a dangerous signal for stocks, especially since the dollar is staying strong.
What to do now
Investors ought to consider giving up recency bias. Recency bias is a natural human tendency. The two recency biases investors ought to avoid are:
• Stocks always go up.
• Dips are shallow and buying opportunities.
Instead of following the recency biases, investors ought to focus on proven models that have performed well in both bull and bear markets. An example is the ZYX Asset Allocation Model. At times like now, we have had defensive measures such as proper allocations to cash and hedges as well as proper portfolio construction 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 [email protected].
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