I’m receiving more than the usual number of emails from investors who are concerned about the stock market potentially falling — crashing, even.
They’re referring to well-reasoned articles published in the media. On the other hand, a smaller number of investors are convinced the market is heading to new highs and are aggressively buying technology stocks.
What should a prudent investor do? Let’s explore the issue with the help of a chart.
Please click here for an annotated chart of SPDR S&P 500 Trust ETF SPY which reflects the S&P 500 Index. Please note the following:
• The chart shows two potential upside targets.
• The chart shows four potential downside targets.
• If you are not already practicing Arora’s Second Law of Investing, consider understanding the nuances: Nobody knows with certainty what’s going to happen next. Not even those with a good track record. In late 2007, we at the Arora Report said stocks were in trouble. Sure enough, about a year later we got a big crash. So you see, even though we were right, it’s exceedingly difficult to get the timing right — there are too many factors at play.
• If nobody knows with certainty, how do you invest? The answer lies in Arora’s Third Law of Investing: Make investing and trading decisions based on probabilities because it’s the only realistic and profitable approach.
• We determine probabilities based on the ZYX Asset Allocation Model. This is a sophisticated adaptive model that has inputs in 10 categories. (Please click here to see the 10 categories.) In plain English, adaptive means the model automatically changes itself based on market conditions.
• At this time, the probability of the stock market reaching the first upside target shown on the chart is 20%.
• The probability of the stock market reaching the first downside target is 30%.
• Keep an eye on large-cap technology stocks such as Apple AAPL, Amazon AMZN, Facebook FB and Netflix NFLX because of their disproportional effect on the stock market.
• Keep an eye on semiconductor stocks because they provided an early indication of this rally. Stocks to watch include AMD AMD, Intel INTC, Micron Technology MU and Nvidia NVDA.
• Keep an eye on software stocks because they have been the market leaders. The stocks to watch are Salesforce.com CRM, Autodesk ADSK, Adobe ADBE and ServiceNow NOW.
The way forward
Many individual investors get in the mode of either being 100% out of the market or being mostly invested in the stock market. At this time, based on probabilities, neither approach is sensible…Read more at MarketWatch.
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