The Federal Reserve fired the big bazooka Sunday, taking the most dramatic step since the 2008 financial crisis.
Many investors are looking at the drop in the stock market Monday and saying the Fed’s actions haven’t helped.
The reality is quite different. Without the Fed’s move, the stock market would be faring worse.
Here are the questions I am being asked by investors: “How low can the stock market go?” “Which stocks and ETFs should be bought, and at which levels should they be bought?”
Let’s explore these with the help of a chart.
Chart
Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA, -8.75%, which tracks the Dow DJIA, -8.91%.
Note the following:
• The chart is a monthly chart to give a longer-term view.
• The chart shows the Arora call Jan. 25 that an external event such as the virus from China could hurt stocks. At that time, not many were paying attention to what was happening in China, and bulls had decided that the virus was of no consequence. As the stock market was making new highs at that time, I was receiving a large amount of hate mail for raining on bulls’ parade. My longtime readers know that I use the hate mail as a proprietary indicator. Often, whichever direction the hate mail goes, the opposite happens when the hate mail becomes extreme. Please see “How an external event could stunt U.S. stocks.”
• The chart shows that Arora long-term portfolios were up to 57% protected at the top of the stock market. The protection has steadily risen to up to 86%.
• The chart shows two support zones.
• The stock market has dipped into the top support zone.
• I have previously written that the top support zone has a 30% probability of holding. This was written when the market was higher. Please see “Do’s and don’ts in this stock market: Don’t panic, do develop a plan — even if you didn’t have one before.”
• I have been urging investors to increase protection on rallies. If you have been following along, you are now in good shape. Please see “As the stock market rallies, put protections on your investing portfolio.”
• What will likely happen if the top support zone shown on the chart breaks? Please start out by reading “A watershed moment is on the way if stocks can’t hold this level.”
• Please click here for a chart of S&P 500 ETF SPY, -7.41%, which tracks the S&P 500 Index SPX, -8.18%. For the sake of full transparency, this chart was previously published when the market was much higher and no changes have been made. Note the point marked “programmed selling.” I had written that if the stock market fell below this point shown on the chart, it was likely to break the support zone underneath it. This is exactly what has happened.
• If the top support zone breaks, similar to the prior event described above, selling can easily cascade down to the “mother of support zones” shown on the chart.
• I have previously written that there is an 80% probability of the mother of support zones holding.
• The chart shows the Arora signal to buy inverse leveraged Nasdaq 100 ETF SQQQ, +20.89% or short-sell Nasdaq 100 QQQ, -6.70% near the top.
• RSI (relative strength index) is very oversold, but there is room for it to get more oversold.
• The chart shows that the volume is low. This indicates that the bulls, buy-and-hold crowd and those suffering from recency bias are still holding strong and have not been selling. This is a negative.
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.
Buying opportunities
Protection bands are based on a total of cash, short-term hedges and short- to medium-term hedges. The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.
Currently the high band of the protection is at 86% and the low band is at 50%. These bands are adjusted in real time based on new data. In plain English, if you are aggressive and young and have protection of 50%, you can start looking at the buy zones.
First, you have to decide where you fall in the protection band based on your own personal situation and preferences. If your protection is less than the recommended, consider selling by scaling out on stock market rallies. If your protection is equal to the recommended, consider buying by scaling in when a stock or ETF falls into the buy zone.
Answers to your questions
Answers to a vast majority of your questions are in my previous writings. You can access some of them here.
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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