The nature of the media and analysts is such that it makes life difficult for investors.
Last September, when the stock market entered a bull trap, the media were promoting analysts who had the most bullish projections. On Christmas Eve, which has turned out to be the low in the U.S. stock market so far, the media were promoting bearish analysts. By then, many formerly bullish analysts had turned bearish. Now that the market has staged a recovery, many analysts have turned bullish again, and the media are promoting bullish stories.
What’s an investor to do? Why not figure out a realistic approach? Is the bottom in or is there more pain ahead? Let’s explore with the help of a chart.
Chart
Please click here for an annotated chart of S&P 500 ETF
SPY, +0.94%
Similar conclusions can be drawn from the charts of the Dow Jones Industrial Average
DJIA, +1.09%
Nasdaq 100 ETF
QQQ, +0.90%
and small-cap ETF
IWM, +1.53%
Please note the following:
• The chart shows that the Arora buy signal to purchase S&P 500 ETF SPY and for aggressive investors of leveraged S&P 500 ETF
SSO, +1.84%
was given on Christmas Eve when massive selling was taking place and many were turning bearish. Hindsight shows that the buy signal was given at the bottom.
• As the chart shows, the resistance zone is right ahead. Expect significant resistance in this zone. Many investors who were overly invested and were smart enough to not panic on Christmas Eve are likely to sell in this zone. Selling may hit popular stocks such as Amazon
AMZN, +1.66%
Netflix
NFLX, +1.56%
Facebook
FB, +3.25%
and Microsoft
MSFT, +0.73%
Selling may also hit popular semiconductor stocks such as Micron Technology
MU, -0.76%
AMD
AMD, +0.88%
and Nvidia
NVDA, -2.49%
If Apple
AAPL, +1.91%
rallies close to $160, it may also see selling. Please see “Here’s how astute investors should think about Apple’s stock today.”
• RSI (relative strength index) shows that the market is getting overbought in the very short term. It is especially important to keep an eye on RSI divergence if the market enters the resistance zone shown on the chart.
• The chart shows that the Arora portfolios were up to 61% protected with cash and hedges before the market started falling.
• The chart shows the Arora signal to reduce cash and deploy it in the market on the probability of a rally given at the bottom.
• The chart shows that the volume is relatively low. This indicates that the rally, so far, does not have high conviction.
• The chart shows that some, but not all, weak hands sold right before Christmas. This is derived from tick trading data and proprietary algorithms. If all weak hands had sold, there would have been significantly more conviction in the rally.
• The chart shows two prior lows. When many had declared that those were the lows, Arora calls were that those were not the likely lows. One of the reasons behind those spot on calls was that weak hands had not sold. Instead, weak hands were buying the dip. I wrote about it both times.
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What to do now
Is the bottom in or is there more pain ahead? Investors need to think in terms of time frames. Clearly, the bottom is in for the very short term. Longer term is a different story. However, given that stocks have risen for almost nine years without a massive slump, it does not take any special systems or some kind of genius to know that investors need to be cautious while still holding good positions.
Investors ought to follow an adaptive model with a proven track record in both bull and bear markets. An example of such a model is ZYX Allocation Model, which automatically changes itself with market conditions. (Please click here to see how this is done.) The model is now advocating de-risking the portfolio on rallies. We have been talking about it since the fourth quarter. In plain English, that means more emphasis on evergreen strategies, a shift to strategies that do well in late economic cycles and heavier allocation to stocks and ETFs that are somewhat defensive in nature. Please see “Here’s an evergreen strategy to make money in a volatile stock market.”
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.
Source : MTV
