A headline that shook the financial world Friday is Bridgewater Associates, the world’s largest hedge fund, betting more than $1 billion that stock markets around the world will fall by March.
Ray Dalio, the head of Bridgewater, said in a response to the Wall Street Journal report that the firm had no such “net” bet, muddying the waters.
Regardless, this is how prudent investors ought to think about the U.S. stock market.
Please click here for an annotated chart of S&P 500 ETF SPY. Similar conclusions can be drawn from the chart of the Dow Jones Industrial Average DJIA.
Note the following:
• The most important point from the chart is divergence in the relative strength index (RSI). This is a huge negative. In plain English, divergence in this case means that while the price has gone up, RSI is now at a lower level.
• RSI divergence indicates loss of internal momentum in the market.
• We have previously written that the market is controlled by the momo (momentum) crowd. A big part of buying in the stock market is not due to fundamentals or macro indicators, but simply because the market is going up.
• Any signal from RSI is a shorter-term signal because it is an oscillator. Oscillators are not very useful for longer-term signals in a bull market.
• The chart is monthly, showing the longer-term trend. The chart includes the crash of 2008.
• From the chart, notice the difference between the stock market performance from the 2000 crash to the 2008 crash, and from the 2008 crash to the present.
• The chart shows the Arora signal to buy stocks aggressively that occurred just before the historic bottom in 2009. The chart also shows the Arora buy signal on Christmas Eve in 2018, which turned out to be the bottom of this swing.
• The chart shows that volume is low. This indicates lack of conviction.
A big reason behind the buying in the stock market is performance chasing going into year-end, and that may be the reason that Bridgewater has picked the time for a decline before March 2020. Please see “‘Performance chasing’ and Trump’s impeachment process could push the Dow to 30,000” and “Everyone is bullish on stocks all of a sudden — here’s why you shouldn’t be.”
• Bridgewater has about $150 billion in assets.….Read more at MarketWatch.
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