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We all want the coronavirus to die off. It is the government’s job to spin reality to keep up the country’s morale. It is the prudent investor’s job to discern the truth.
The key questions for investors are: Where is the bottom in the stock market? Should you buy or sell stocks now?
Let’s examine with the help of a chart.
Please click here for a chart of the Dow Jones Industrial Average ETF DIA, +1.35%, which tracks the Dow Jones Industrial Average DJIA, +1.34%.
Note the following:
• Look at the last bar. After touching the top band of the mother of support zones, the stock market has moved above the top band of the support/resistance zone. From a technical perspective, this shows significant optimism in the face of worsening coronavirus news.
• The chart shows that RSI (relative strength index) is nowhere near the level shown at the last major bottom. This indicates there is significant risk in this market that investors are underappreciating.
• The chart shows the Arora call on Jan. 22 that the coronavirus could cause problems for the stock market. This call was repeated on Jan. 30. Meanwhile, the S&P 500 Index SPX, +1.72% was on its way to new high Feb. 19.
• When the Dow was in 16,000-point range, I was calling for the index to reach 30,000 while President Trump was in office.
• When the Dow reached almost 30,000, I didn’t raised my target. It was not because I knew the coronavirus would come along, but because our adaptive ZYX Asset Allocation Model was keeping us cautious.
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.
Where’s the bottom?
The mother of support zones has an 80% probability of holding — this along with RSI should be the main reference points to look for a bottom. There is simply too much optimism in the stock market, and in many cases investors are buying without doing research.
Here are a few examples:
• Abbott Laboratories ABT, +7.74% has come up with a coronavirus test that takes five minutes. The revenues from the coronavirus test will dwarf those that Abbott is likely to lose due to issues related to coronavirus. Investors are running up the stock.
• Johnson & Johnson JNJ, +6.75% is making great progress on a coronavirus vaccine. Johnson & Johnson is likely to sell the vaccine at cost. This will have no material increase in earnings. Investors are running up the stock.
• General Motors GM, -0.42% will make ventilators. It is selling them at cost, so they will have no impact on earnings. Investors are running up the stock.
• Medtronic MDT, +2.36% makes ventilators, which are a small portion of its business. At the same time, Medtronic is suffering because its sales are likely to drop due to the postponement of non-essential surgeries. Investors aren’t seeing the whole picture. And, yes, they are running up the stock.
The foregoing shows that there is simply too much optimism. Investors aren’t able to judge correctly. In my 30-plus years in the stock market, I have never seen investors behave this way. To decide on buying or selling, use an objective framework. Please read “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide.”
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. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
