After nine years of this raging bull market in stocks, this is the most important question for investors now: Bulls or bears — who is right? Let’s start with a chart.
Please click here for the annotated chart of S&P 500 ETF
SPY, +0.14%
Similar conclusions can be drawn from a chart of the Dow Jones Industrial Average
DJIA, +0.23%
The other two popular ETFs — Nasdaq 100 ETF
QQQ, +0.27%
and small-cap ETF
IWM, -0.07%
— look different. Since the most money is tied to the S&P 500 Index
SPX, +0.08%
this is the index to look at if one could look at only one chart. Please note the following from the chart:
• The rally failed at the resistance level.
• The market is now around the trend line.
• If the trend line decisively breaks, the next two support levels are shown on the chart.
• Previously the relative strength index (RSI) traced higher lows. But now RSI has traced a lower low.
• Volume is unremarkable.
The only reasonable conclusion that can be drawn from the traditional technical analysis is that the market has lost its momentum, but is still not in the imminent danger of a bear market.
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.
Special factors
There are several special factors coming into play.
• Window dressing is in play. Some money managers buy winning stocks at this time so they can show in their reports that they were holding winning stocks.
• Some money managers may rebalance at this time and take profits.
• New money flows into the market during the first couple of days of a new quarter.
• There is a holiday (July 4) in the middle of the week. This will reduce liquidity and increase volatility.
• The jobs report is due next Friday (July 6). Often the market makes a big move ahead of the jobs report based on rumors and estimates.
• The momo (momentum) crowd money flows are positive in popular stocks such as Amazon
AMZN, -0.10%
Netflix
NFLX, -1.01%
Facebook
FB, -0.97%
and AMD
AMD, -2.09%
Smart money flows are negative in Tesla
TSLA, -1.99%
Nvidia
NVDA, -1.64%
Alibaba
BABA, -1.51%
and Microsoft
MSFT, -0.02%
For details, please see “‘Hot’ money is flowing into Netflix, Facebook and Amazon again.”
• The dollar is stronger.
• Emerging market currencies are under assault.
Macro and fundamentals
The most reliable proven model I know for answering the question asked in the headline is the ZYX Global Multi Asset Allocation Model. The model has inputs in 10 categories. Please click here to see the 10 categories. The model is currently moderately bullish and advocates a fair amount of cash and adequate hedges. The model went into mostly cash in late 2007 before the great recession when most investors lost half their money. During 2008, the model advocated using inverses ETFs and short positions for those who could short, and generated a 45.9% positive return during the period in which S&P 500 fell by 36%.
Please keep in mind that markets are dynamic and conclusions of the model can change very quickly. It is important to stay tuned.
Special situations
In this environment, special situations are especially attractive because they do not highly depend on the market direction. For example, Pinnacle Foods
PF, -0.20%
was bought by The Arora Report at $32.50 in anticipation of an eventual buyout. Now Pinnacle Foods has a buyout offer from Conagra Brands
CAG, -0.28%
generating a 109% return for those who followed us on this call.
Do not get suckered
In this market environment, we are seeing an extraordinary number of situations in which investors get suckered in and then are left holding the bag. A good example is marijuana stocks that ran up after the legalization vote in Canada. Please see “Investors are making stoner moves by buying marijuana stocks at the wrong time.” The Arora Report calls on two marijuana stocks highlighted in the column have proven spot on. Canopy Growth
CGC, -4.41%
lost about 25% of its value from the peak. Neptune Technologies
NEPT, -4.62%
lost about 30% of its value from the peak.
Arora’s Second Law of Investing
Investors are well-advised to keep Arora’s Second Law of Investing in mind and stay clear of gurus and analysts who claim to know otherwise. Arora’s Second Law states that no one knows with certainty what is going to happen next. The best we can do is to make prudent decisions based on probabilities. This is exactly what the ZYX Global Allocation Model does.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. 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
