I am receiving a large number of complaints about the stock market’s wild swings as the new coronavirus spreads across the U.S.
My suggestion is to not complain. The reason is that there is nothing you can do. Investors ought to accept the swings, focus on making money from them with short-term trades while protecting their portfolios. For example, “Coronavirus brings opportunities in gold — just like in the good, old days.”
Big swings in prices are an indication of a top or a bottom in the stock market. Which one is it? Here is how to decide, with the help of two charts.
Two charts
Please click here for a long-term chart of the Dow Jones Industrial Average ETF DIA, which tracks the Dow DJIA. For the sake of transparency, this chart was previously published, and no changes have been made.
Please click here for an annotated short-term chart of Nasdaq 100 ETF QQQ.
Note the following:
• I chose the chart of Nasdaq 100 ETF instead of a chart of S&P 500 ETF SPY, which tracks the S&P 500 Index SPX. Most money is tied to the S&P 500 and not to the Nasdaq 100 or the Dow Jones Industrial Average. However, it seems that most investors’ portfolios are concentrated in five mega-cap stocks: Apple AAPL, Microsoft MSFT, Amazon AMZN, Alphabet GOOG, GOOGL and Facebook FB. The Nasdaq 100 ETF has heavier weightings of those five stocks than the S&P 500 does. For example, Apple has a weighting of 4.85% in the S&P 500 and a weighting of 11.67% in the Nasdaq 100.
• The second chart shows six wild stock market swings that have recently happened
• The first chart shows that the stock market is still levitating above the long-term trendline The starting point of the long-term trendline is the Arora buy signal given in 2009 to aggressively buy stocks, which has turned out to be the start of the bull market.
• The stock market was gently trending slightly above the trendline until Donald Trump’s election At the time of the election, most analysts were predicting a big selloff in the stock market. At that time, The Arora Report issued a buy signal followed by several calls for Dow 30,000 points. Please see “Here’s the case for Dow 30,000 in Trump’s first term” The stock market took off and deviated from the long-term trendline. This point is shown in the middle of the first chart.
• The first chart shows that RSI (relative strength index) is not yet oversold on a monthly basis
• The white horizontal line shown on the chart in the RSI pane represents the oversold level
• Note from the first chart how oversold RSI got at the start of this bull market
• On a fundamental basis, the stock market is overvalued compared with its own historical valuations
• On a fundamental basis, the stock market is significantly undervalued when compared to the 1% yield on 10-year Treasury bonds…Read more at MarketWatch.
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