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For investors trying to navigate this stock market, not enough is known about the coronavirus. There is a divergence of opinions on almost all points. The result is an environment in the market that is creating both perils and opportunities.
Many important pieces of data that affect the stock market are missed by the mainstream media and the momo (momentum) crowd, which jumps on whatever is presented to them.
An example on the positive side is data from Boston. Please see “Stock-market investors should pay attention to baffling coronavirus data from Boston.” An example on the negative side is new research published by the Centers for Disease Control and Prevention that air conditioning aids in spreading the coronavirus.
This last piece of news is only a limited amount of data, but investors should not dismiss it. Most new pieces of information start with a small thread. For example, in November 2019, there was a bit of news about the spread of a new mysterious virus in China that I was paying attention to. At that time, most stock market analysts were not aware of this virus.
The new limited data on air conditioning and the coronavirus can potentially be a huge problem as the U.S. economy is beginning to open up. But also imagine the opportunities to solve the problem.
Let’s explore with the help of a chart.
Chart
Please click here for an annotated chart of the SPDR Dow Jones Industrial Average ETF US:DIA, which tracks the Dow Jones Industrial Average US:DJIA.
Note the following:
• The most important takeaway from the chart at this time is that the stock market is at the lower band of the resistance zone.
• Historically, it is not a good setup to buy the stock market when it is at the lower band.
• The chart shows the top support zone. In theory, it would be best to commence buying on a pullback to the support zone or on a stock market break above the resistance zone.
• The first leg of the short-squeeze-related activity that has been in large part responsible for the stock market rally has now ended. This does not mean that a second leg cannot start. Please see “The force that’s propelled the stock market rally will exhaust itself this week.”
• One of the perils right now is in the popular stocks that have moved up. A good example is Netflix US:NFLX stock. Netflix stock has rallied because people are staying home and binge-watching TV shows and movies.
However, investors ought to look at the other side as the economy opens up — Netflix viewing will likely fall. Barring other developments, Netflix stock may come back down to Earth, especially in view of the strong success of Disney’s US:DIS streaming channel.
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• In a very short time frame, there is a glimpse of what can happen to stocks like Netflix. The Arora Report gave a signal to short-sell Netflix stock when it traded at $480 in the aftermarket Tuesday, following its earnings release. The premise behind the signal was that investors were excited about good earnings but were not thinking of what happens after the economy opens. As a stroke of luck, many other investors realized the issue and sold Netflix. We were able to give a signal to take profits by buying-to-cover Netflix stock at $424 a short time later.
• A similar problem with Netflix stock is emerging in popular stocks such as Amazon US:AMZN, Microsoft US:MSFT, Zoom Video US:ZM, Teladoc US:TDOC and Slack US:WORK.
• On the flip side, there are positive implications of the economy opening up for shares of Apple US:AAPL, Facebook US:FB, Alphabet US:GOOG US:GOOGL and AMD US:AMD.
• Innovation is alive and well. Many opportunities are emerging in stocks that most investors have never heard of.
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.
