Investors are in a euphoric state as the stock market bubble gets bigger

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European Central Bank President Mario Draghi turned ultra-dovish in a speech in Portugal on Tuesday.

Draghi is almost pre-committing to more monetary stimulus as risks rise. Is this a motivation for Federal Reserve Chairman Jerome Powell and his cohorts to cut interest rates as they meet this week?

President Trump on Tuesday blasted Draghi because stimulus in Europe means a lower euro versus the dollar, giving an edge to European companies in their exports to the U.S. On the other hand, the U.S. stock market is encouraged by Trump’s tweet of a “very good” phone call with President Xi of China and the news of an extended meeting with him at the G20.

Let’s explore the good and the bad of these moves for stocks with the help of a chart.

Read: Executives say Trump’s China tariff threat leaves them ‘panicked’

Chart

Please click here for an annotated chart of S&P 500 ETF












SPY, +1.05%










Similar conclusions can be drawn from the charts of the Dow Jones Industrial Average












DJIA, +1.35%










Nasdaq 100 ETF












QQQ, +1.45%










and small-cap ETF












IWM, +1.16%









Please note the following:

• Stocks compete with bonds. Bonds rise when interest rates fall.

• Lower interest rates are likely good for the stock market in the short term.

• The bubble is already developing in debt, both government and private.

• Lower interest rates will simply enlarge the bubble.

• Bubbles eventually burst. Of course, it is difficult to call when this bubble will burst.

• The chart shows resistance for the stock market.

• Resistance becomes support for stocks when the price crosses above it.

• The relative strength index (RSI) on the chart shows there is room for the stock market to run.

• Volume shown on the chart is relatively low. This indicates that there is not high conviction in this rally in the stock market.

• Irrespective of significant risks, popular large-cap tech stocks such as Facebook












FB, -0.29%










Google












GOOG, +1.02%











GOOGL, +1.04%










Amazon












AMZN, +0.81%










and Apple












AAPL, +2.35%










are running up. Investors find it easy to park money in those highly liquid stocks.

• There are short squeezes in new IPO stocks such as Beyond Meat












BYND, -0.04%










Fiverr International












FVRR, -9.39%










CrowdStrike












CRWD, +9.27%










and Zoom Video Communications












ZM, +1.56%









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.

What to do now

Let’s bring some common sense to the forefront. Is there a free lunch here? The answer from the politicians, central bankers, stock market permabulls as well as from buy-and-hold mom-and-pop investors is a resounding “yes.”

What to do now depends on your belief in this free lunch. I, for one, do not believe in free lunches. The debt bubble is getting bigger and will eventually burst. Many investors will get badly hurt. Think of it as a party where almost everybody is drunk and all the drunken people claim that nobody is drunk. I would suggest to investors that they enjoy the party but be aware of the risks ahead.

At The Arora Report we translate this into positions to buy, sell and hold through the ZYX Asset Allocation Model with 10 inputs. (Please click here to see the 10 inputs.) The model produced a gain in 2008, the last time the bubble burst. And the model gave an aggressive buy signal in March 2009 and has stayed bullish since then. But at times, like now, we’ve had defensive measures such as proper allocations to cash and hedges. Moreover, portfolio selection is important to control risks.

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