Would you be prepared if the Dow Jones Industrial Average fell another 4,000-plus points?
That kind of decline sounds shocking. But it’s instructive because it points to an important element of investing: preparedness.
The Dow has fallen more than 4,000 points from its high this year — all of it in the fourth quarter. In mid-October I suggested that investors be prepared for a sudden downdraft, asking in a column “Would you be prepared if the Dow Jones Industrial Average were to fall 5,700 points?” I chose that number because the Dow fell 23% on Black Monday in October 1987, equivalent to about 5,700 points today.
I also warned against what passive investing can do to the market. If you are a regular reader, you already know this and hopefully took protective steps when the market was near its highs.
For today, the more important question is: “What to do now?” Let’s explore with the help of a chart.
Chart
Please click here for an annotated chart of S&P 500 ETF
SPY, -0.13%
Similar conclusions can be drawn from the charts of Dow Jones Industrial Average
DJIA, -0.33%
Nasdaq 100
QQQ, -0.05%
and small-cap ETF
IWM, +0.29%
Please note the following from the chart:
• The chart shows a number of warnings issued by The Arora Report at the market top and since then.
• All of the calls can be easily verified by anyone.
• The chart shows that RSI (relative strength index) is very oversold.
• When the market gets very oversold, sharp rallies often ensue.
• Based on a large number of factors, such as technicals, sentiment, put/call ratios, smart money flows, momo (momentum) crowd money flows, short squeezes, new economic data, positive notes from China and fundamentals, the stock market was set up for a sharp rally. Then the news from Washington called the setup in question.
• The setup for a sharp rally is still there if there is the slightest bit of positive news.
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.
The real reason
There is some slowing in the economy, data show. However, the real reason for the selling is that investors over-own popular stocks. The analogy of everyone on one side of the boat — which I explained regarding tech stocks to Becky Quick on CNBC — applies to all popular stocks and the indices.
No permabear
When the Dow was around 16,000 points, I was among the few who called for Dow 30,000. During the rise, I repeated that call several times. Please read “Here’s the case for Dow 30,000 in Trump’s first term.”
In March 2009, which turned out to be the start of this bull market, The Arora Report gave a signal to aggressively buy stocks. That signal was given after The Arora Report gave another in 2007 to be 100% protected with cash and hedges. In 2008, The Arora Report called for buying inverse ETFs that go up when the market goes down and aggressively short-sell. In 2008, when most portfolios lost half of their value, The Arora Report generated a positive return of 45.9%.
What to do now
Here are some things to consider.
• If you were following the high cash levels and significant hedges prescribed by The Arora Report when the market was at the top, it is time to deploy some cash in very small tranches and take profits on some hedges.
• The selling is mostly technically driven. This is not the time for wholesale liquidation.
• Focus on buying special situations and evergreen strategies that work in both bull and bear markets. Please read “Here’s an evergreen strategy to make money in a volatile stock market.”
• Our plan is to again raise more cash and establish more hedges on rallies.
• Make sure you are not overly concentrated in FAANG stocks including Facebook
FB, -0.98%
and Netflix
NFLX, +0.20%
and also popular stocks such as Micron Technology
MU, -1.13%
and Nvidia
NVDA, +1.89%
• In spite of the headlines, the Fed did the right thing for the long-term good of investors and the U.S. economy. Please see “The Fed’s Powell prevented a stock market crash by throwing red meat to the bears.”
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
