At this time when coronavirus cases have topped one million worldwide, investors are trying to figure out what is next for the stock market. This analysis just became more complicated due to huge moves in crude oil that should be considered dubious. given that demand for crude has fallen off the cliff due to coronavirus shut downs. There is a strong correlation between crude oil and the stock market. If that was not enough, there are anomalies in the jobs report.
Under these circumstances, it is important for investors to figure out what really matters and what does not. Given that dubious oil rally and anomalies in the jobs report, stock-market rallies should be used to raise more cash based on the protection band criteria (more later in this article), and rallies should be used to build protection for long-term portfolios. I have previously written that the stock market’s rally has a 65% probability of failing. Let’s explore with the help of two charts.
Two charts
Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA, -2.21%, which tracks the Dow Jones Industrial Average DJIA, -2.32%.
Please click here for an annotated chart of crude oil futures CL00, +9.00% CL.1, +9.00%. Investors who are not comfortable with oil futures may look at an oil ETF like the United States Oil Fund USO, +11.67%.
Note the following:
• The first chart is a monthly chart to give investors a long-term perspective.
• The second chart is a 15-minute chart to give investors a very short-term perspective.
• The stock market was showing all of the telltale signs of falling and testing the old lows when President Trump stated that Saudi Arabia and Russia would cut 15 million barrels in crude production as shown on the second chart. There was first a report from Russia of denial of any deal and then a report from Saudi Arabia stating that Trump had exaggerated. The second chart shows oil retreated on the reports from Russia and Saudi Arabia.
• The second chart shows that oil was retreating further when the news came of an OPEC plus Russia meeting. It also shows aggressive buying in oil by the momo (momentum) crowd on the news.
• Stock-market futures were substantially down on coronavirus cases crossing one million but were pulled up by a very strong up move in oil.
• The first chart shows that RSI is nowhere near the last major bottom. This indicates there is room for the stock market to fall further.
• The first chart shows the “mother of support zones” for the stock market. To learn more, please read “The stock market is getting dangerously close to the ‘mother of support zones’” The chart shows the stock market touched the top band of this support and subsequently rebounded to the low end of the top support/resistance zone shown on the chart. Such behavior is common and was to be expected.
• The jobs report showed March private non-farm payrolls fell 713,000 vs. a consensus of a fall of 250,000. There are several anomalies here. Investor should consider ignoring this jobs report, just like the prior initial jobless claims report.
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.
Protection bands
Even though the stock market has rallied from the lows, there has been no all-clear signal. As we have previously written, the sharpest rallies occur in bear markets. Rallies of about 20% are to be expected. In this coronavirus-influenced stock market, it is important that investors use an objective framework of protection bands before buying stocks. For details, please see “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide.”
Semiconductor stocks have been leading indicators for the stock market. For this reason, it is important to watch semiconductor stocks such as AMD AMD, -5.64% and Micron MU, -0.75%. It is also important to watch large-cap technology stocks such as AAPL, -2.00% and Microsoft MSFT, -1.70%.
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.
