As the coronavirus spreads across the U.S., the question I am being most often asked is how low can the stock market go.
Let’s examine this question with the help of two charts.
Please click here for a long-term monthly chart of the Dow Jones Industrial Average ETF DIA, -0.98%, which tracks the Dow DJIA, -0.97%. For the sake of transparency, this chart was previously published, and no changes have been made.
Please click here for a daily chart of S&P 500 ETF SPY, -1.66%, which represents S&P 500 Index SPX, -1.70%. Even though many investors’ portfolios resemble the Nasdaq 100 ETF QQQ, -1.68%, it is better to use a chart of SPY for the purpose of determining how low this stock market can go.
Note the following:
• Start out by carefully studying the first chart for a long-term perspective. Please read “The stock market’s big swings indicate a top or a bottom — here’s how to decide” and “As the stock market rallies, put protections on your investing portfolio.”
• The second chart shows the point at which a significant amount of pre-programmed selling by the machines may occur.
• There are likely many stops below the point marked “programmed selling” on the chart. If the stock market dips below this point the selling may accelerate as stops get taken out.
• If the historical patterns hold true and there is no new unexpected news on coronavirus the stock market may rally after the stops are taken out.
• Any programmed selling should be contained to the top major support zone shown on the first chart.
• The programmed selling point shown on the first chart is the top band of the support zone shown on the chart.
• If the market rallies from there bulls would say that there was a successful retest. A successful retest will mean it’s time to buy for short-term trades.
• If the bottom band of the top support zone is broken that will likely be a watershed moment.
• If the watershed moment occurs the next major support zone is shown on the chart.
• The bottom band of the lower support zone band is where the Arora buy signal was given on Christmas Eve 2018 which turned out to be a great buying opportunity and the bottom of the dip.
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.
Those who have been my longtime readers already know that I’ve given buy signals near lows in the market. When Donald Trump was elected I predicted Dow 30,000 points. Please see “Here’s the case for Dow 30,000 in Trump’s first term.”
Many readers are asking why I haven’t given a buy signal given that the stock market has plunged. Just because the stock market has dipped does not mean it is an automatic buy. Markets are complex.
Due to the long bull market — 10-plus years — a simple approach of buying every dip has worked in the past. The past is still likely a prologue to the future but extra caution is warranted. That caution is not due only to the coronavirus. It is primarily due to the length of the bull market and heavy borrowing by governments. Trees do not grow to the sky. Please see “This 25-year stock market chart shows investors are under a spell of bullishness.”
It is high time for investors to bring some sophistication to their investments other than just either sending the money to funds or buying when the stock market dips.
Hope is not a strategy
Investors who are still stubbornly refusing to bring sophistication to their investing are clinging to the hope that the next 10 years in the stock market will be the same as the last 10 years are depending on hope and luck.
Hope is not a good strategy.
What does it all mean?
Here are a few things investors can do.
• Before the drop in the stock market long-term portfolios at The Arora Report were up to 57% protected. Since then, we have increased protection. Investors ought to review their protection levels on a daily basis during these volatile times.
• Protection should be based on a strict proven framework and not done willy-nilly.
• All investors should watch the “five big” stocks because they each have different characteristics and provide important clues. The big five are Apple AAPL, -1.35%, Amazon AMZN, -1.19%, Microsoft MSFT, -2.82%, Alphabet GOOG, -1.56% GOOGL, -1.44% and Facebook FB, -2.24%.
• Semiconductor stocks have been leaders, but they have fallen less, relative to their beta during the rise Just take a look at three charts of Intel INTC, -2.08%, Micron Technology MU, -4.18% and Nvidia NVDA, -2.65%. A study of these four charts will show that there is still more complacency among investors than is justifiable by the price action.
• AMD has laid out a very strong road map and given targets for rapid growth to 2023 Carefully watch how AMD stock behaves.
• Watch gold ETF GLD, +0.03%, silver ETF SLV, -0.73% and gold miner ETF GDX, -1.42%. Please see “Gold breakout’s while the stock market is rising should concern investors”
• Consider opportunistically doing short-term trades Please see “Coronavirus brings opportunities in gold — just like in the good, old days”
• Watch coronavirus vaccine stocks Inovio Pharmaceuticals INO, +43.77%, Moderna MRNA, +5.71% and Novavax NVAX, -3.03%, coronavirus drug stock Gilead Sciences GILD, +5.38%, face mask stock Alpha Pro Tech APT, -13.17% and coronavirus test stock Co-Diagnostics CODX, -9.54%.
Even Warren Buffett has subtly warned about not being cautious in the stock market Please see “Buffett is bullish on stocks but says the market can drop 50% — is he wrong?”
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.