It is no secret that President Trump watches the stock market. It is less well understood that he has an uncanny sense of stock market timing. Every time stocks seem poised for a big drop, he says something to reverse the tide. He then follows through with more statements to extend the bounce.
I am politically agnostic. My sole job is to help investors. Having said that, even opponents of Trump with some objectivity ought to give him credit for his sense of market timing. Regardless, here is the key question: “What do all these gyrations mean for the stock market?” Let’s explore with the help of a chart.
Read: White House trade adviser says it’s a ‘certainty’ bull market lasts through 2020
Chart
Please click here for an annotated chart S&P 500 ETF SPY, +1.14%. Investors with a heavy concentration in technology may consider Nasdaq 100 ETF QQQ, +1.48%.
Note the following:
• The chart shows the support zone. To learn why investors should use support zones and not just specific support levels, please see “Why you need to understand support zones in the stock market.”
• The chart shows that when the stock market swooned on concerns related to the inverted yield curve, it did not even penetrate the support zone. This is a big positive for the stock market.
• The stock market has mostly recovered from the swoon primarily due to Trump’s statements.
• The chart shows the Arora buy signal given on Christmas Eve that has turned out to be the low of this cycle.
• The chart shows four Arora signals given before the recent market drop to take profits on select positions, protect long-term portfolios with hedges, take profits on a position in China ETF ASHR, +1.27% and do a short-term trade. The short-term trade was to short-sell Nasdaq 100 ETF or buy leveraged inverse Nasdaq 100 ETF SQQQ, -4.41% for those who could not short-sell. SQQQ is an inverse ETF that goes up when the stock market goes down. Profits have now been taken on this short-term trade. New short-term trades on bond ETFs TLT, -1.23% and TBT, +2.36% have been started.
• The RSI (relative strength index) shows that, from here, the market can go either way.
• The chart shows churning with high volume. This indicates indecision. Right now volume shows that bulls and bears are in balance but both have higher conviction than before.
• Apple’s AAPL, +2.63% stock is in the crosshairs of the trade war. However, Apple has rallied on the strength of Tim Cook having dinner with Trump, and Trump understanding that Chinese tariffs may put Apple at a disadvantage compared to Samsung SSNLF, +0.00%.
• It appears that the deadline for U.S. companies to comply with the ban on Huawei has been extended by 90 days. This is benefiting semiconductor ETF SMH, +1.77%, Micron Technology MU, +3.38%, AMD AMD, +2.55% and Intel INTC, +1.48%.
• As the market rises, popular stocks such as Amazon AMZN, +1.50% and Facebook FB, +1.37% are participating. This is a positive for the stock market.
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What to do now
The chart tells the real story. The real story is about indecision — where bulls and bears are equally matched.
For these market conditions, investors ought to use a comprehensive adaptive model that has proven itself in both bull and bear markets to guide them. An example of such a model with 10 inputs is the ZYX Asset Allocation Model. I have previously written: “Investors who do not have appropriate cash levels and hedges in place for these market conditions ought to consider taking protective steps on strong up days. Investors ought to resist the temptation of selling or establishing new hedges when the market is down 800 Dow points.” Now that the market has bounced back, this is the time to start putting some hedges and start raising some cash if you have not previously done so.
Consider guarding against the natural human tendency of selling on strong down days and buying when the market jumps.
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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