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The U.S. now has the most coronavirus cases. Still, “bit chompers” in the stock market helped produce a 20% gain in major indexes in only a few days.
That’s something I have not seen in my over 30 years in the markets.
Who are the bit chompers? The anecdotal evidence is that they are the same investors who were leveraged to the hilt and aggressively buying during the 10-year-plus bull market, leading the stock market index S&P 500 SPX, -3.33% to a new high Feb. 19. When the market crashed, they suffered massive losses.
Perhaps they felt they had no choice but to aggressively buy on this dip to make up for their losses. No wonder they were chomping at the bit to buy.
Should you follow the bit chompers? Let’s explore with the help of three charts.
Three charts
Please click here for an annotated chart of Dow Jones Industrial ETF DIA, -3.67%, which represents popular stock market index the Dow Jones Industrial Average DJIA, -3.86%.
Please click here for an annotated chart of volatility ETF VXX, +8.94%, which represents VIX, +10.38% — the so-called fear gage of Wall Street.
Please click here for an annotated chart of food service company Sysco SYY, -2.31%.
Note the following:
• The first chart is monthly, which shows a long-term perspective.
• As the first chart shows, the strong rally in the stock market has prompted the Dow to break the support/resistance zone to the upside. From a technical perspective, this is very positive.
• The plan is to look for the Dow to stay above the resistance zone shown on the first chart.
• The second chart shows that, even though the stock market has rallied strongly, the volatility index ETF has not fallen.
• In theory, VXX should have fallen as the stock market rose. There is a technical explanation that the volatility index has not fallen because of the volatility in the stock market to the upside.
• You cannot trade the volatility index, but you can trade the volatility ETF.
• My long experience with VXX shows that, theory aside, the real reason it’s not falling is because prudent investors are buying protection for their stock portfolios and not selling protection.
• The third chart shows a very simple but powerful technique to make money from short-term moves in this stock market that is easy to use.
• The third chart shows the Arora buy zone of $25 to $28.31 in food service company Sysco published March 15 as one the 16 stocks in our Coronavirus Portfolio. The stock dipped in the buy zone March 18 and then skyrocketed.
The gains have been substantial in a matter of days — 50% on Sysco, 117% on casino company Penn National Gaming PENN, -9.65%, 84% on senior housing stock Ventas VTR, -2.61% and 64 % on oil service company Halliburton HAL, -7.94%. Note that those four companies are in different sectors for diversification reasons and all are substantially negatively affected by the coronavirus.
When executing this strategy, diversification is important. It’s similar to the “January Effect” strategy we have consistently used year after year.
• Bit chompers also are aggressively buying cruise line stocks such as Royal Caribbean RCL, -13.11% and Carnival CCL, -14.03%, as well as airlines such as American Airlines AAL, -8.24% and Delta Air Lines DAL, -6.03%.
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.
Potential good news
I have previously written that there is potential good news ahead in the form of an antiviral drug that works. Here is a chart showing chloroquine success in a small study, the drug that Trump has touted. There is also a Chinese study that shows the drug does not work. Doctors and researchers are also working on dozens of other potential treatments, including repurposed drugs.
Consider using an objective framework to decide if you want to buy, sell or hold. Please see “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide” and “Stock market opinions abound — here’s an objective way to tell when the market bottoms.”
Answers to your questions
Answers to some of your questions are in my previous writings. You can access them here.
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.
