President Trump has a new calculation relating to his reelection and China tariffs. The calculation centers around a potential “President Biden.”
Many investors have not caught on to the new calculation and may be stuck in the old paradigm. They ought to wake up for their own protection.
Let’s explore this issue with the help of two charts.
Charts
Please click here for an annotated chart of ETF DIA, -1.93% which represents the Dow Jones Industrial Average DJIA, -1.88%
Please click here for an annotated chart of ETF SPY, -1.98% which tracks the S&P 500 Index SPX, -1.93% For the sake of transparency, this is the same chart that was previously published.
Please note the following:
• The first chart shows the comment by the administration that talks with China were constructive. The stock market staged a strong rally based on this vague comment. Later on there were more vague positive comments coming from the administration regarding China trade talks.
Read: Trump says China is making a losing bet in the 2020 election
• The VUD indicator acts like an X-ray of the market. The VUD indicator is the most sensitive measure of supply and demand in the stock market in real time. Orange on the chart shows net supply. In plain English, as the stock market staged a strong rally, there was net selling in equities.
• The chart shows that the smart money — professional investors — was also selling into the rally.
• The rally was caused by aggressive buying by the momo (momentum) crowd. The momo crowd is not known for deep analysis. The momo crowd bought shares obliviously.
• The second chart was published before the breakdown of trade talks. The chart shows two potential traps — a bull trap and a bear trap.
• The potential bull trap is characterized by the breakout of stock prices above the green line shown on the chart.
• The potential bear trap is shown by stock prices falling below the orange line shown on the chart.
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‘President Biden’ calculation
President Trump tweeted: “China is DREAMING that Sleepy Joe Biden, or any of the others, gets elected in 2020. They LOVE ripping off America!”
The previous calculation was that Trump needed the China trade deal for his reelection, and for that reason a trade deal was imminent. Short-sighted investors were even rooting for a softer trade deal that would have not been good for the United States in the long term. You may recall that The Arora Report took the position that investors should be concerned about both the upside and the downside in the stock market as a China deal was not a sure thing.
Here is the new calculation regarding the reelection.
• If President Trump were to strike a soft deal with China, Democrats would use it to their advantage. Biden may be especially effective in attacking Trump on such a deal.
• On the other hand, if Trump takes a hard line with China, he could send a clear message to his base that China is waiting for President Biden so that it can get a better deal.
• Trump is a master of messaging.
• He won the last election by intuitively tuning in to the anger among a certain part of the American public.
• Now Trump is again tuning into sentiment among the American public that China has taken advantage of the United States.
• The new calculation is that a “no trade deal” with China helps Trump get reelected against Biden. A softer trade deal with China may result in Biden becoming president.
Popular stocks
Investors should review their positions in stocks with direct exposure to China, such as Apple AAPL, -4.63% Starbucks SBUX, -2.42% Nike NKE, -2.18% and Boeing BA, -2.70% Semiconductor stocks, such as AMD AMD, -4.95% Micron Technology MU, -2.94% and Nvidia NVDA, -3.87% are vulnerable. Intel INTC, -1.54% is less vulnerable because the stock has already fallen due to its own internal woes.
Popular Chinese stocks, such as Alibaba BABA, -4.17% and JD.com JD, -1.28% represent higher risk.
Probabilities
Investors ought to pay attention to Arora’s Third Law of Investing and Trading: Making investing and trading decisions based on probabilities is the only realistic and profitable approach. Here are the latest probabilities:
• Bull trap coming true: 40%
• Bear trap coming true: 30%
• Whipsaws: 30%
In plain English, this means that there is a 40% probability of the market extending a decline.
Portfolio protection
At The Arora Report, portfolios were protected with cash and hedges before the downturn in the stock market, which started a week ago. Immediately after the Trump tweet, when the market was higher, we increased protection. Now we are further increasing protection. We also plan to take advantage of the opportunities created by this situation as good stocks and ETFs dip into our buy zones. There will also be opportunities for short-term trades in both long and short directions.
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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