In short order, greed in the stock market has mostly taken over fear after reports of slowing new coronavirus cases in New York and Europe.
Is it prudent to chase the rally? The answer is “no” without knowing where you belong in the protection band. (More on that later.) The best way to analyze the stock market is through multiple time frames. Let’s examine with the help of two charts.
Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA which tracks the Dow Jones Industrial Average DIA.
Please click here for an annotated chart of S&P 500 ETF SPY which does the same for the S&P 500 Index SPX.
Note the following:
• The first chart gives a long-term perspective.
• The second chart gives a short-term perspective.
• The second chart shows that 60% of the rally is driven by a short-squeeze. In a short-squeeze, short-sellers feel compelled to buy to cover. This is artificial buying, and sooner or later it exhausts itself.
• The second chart shows a breakout.
• The second chart shows resistance zone that is overhead.
• The second chart shows RSI (relative strength index) divergence. In plain English, it means that RSI went up as the stock market price went down.
• In isolation, the second chart is giving an all-clear signal to buy stocks. However, investors should never look at only one time frame. It is important to look at multiple time frames.
• The conclusion from the first chart is quite different from the second chart. In total, the first chart is still showing that this is a relief rally, and the probability is reasonably high for the rally to fail.
• Earnings season is ahead. Companies are likely to cut or withdraw guidance.
• There is about $6 trillion worth of monetary and fiscal stimulus. In the short term that is helpful to the stock market. Are there no consequences in the long term of printing and borrowing money?
• Investors have said there was no warning of the coronavirus. That’s untrue. On Jan. 22, The Arora Report’s call was that the coronavirus could cause a drop in the market. After finding that investors continued to buy stocks, I wrote on Jan. 30 that arrogance and greed among momentum investors “may prove to be dangerous for investors.” Other than a potential cure, the course of the stock market rally will depend on the behavior of naked investors. Please see “‘Naked’ investors — not coronavirus numbers — will determine how much stocks rally.”…Read more at MarketWatch.
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