Nothing has changed in the stock market in my three-plus decades in four respects.
1. When stock prices go down, bearish gurus come out of the woodwork and start fear-mongering.
2. When stock prices go up, bullish gurus come out of the woodwork and start making rosy predictions.
3. Many gurus appear to look at what stock prices are doing and then come up with the arguments to justify the price levels.
4. When stock prices are going down, the media give prominence to the bears. When stock prices are going up, the media give prominence to the bulls.
Often investors get whipsawed or misled by the foregoing. Shouldn’t the gurus be first objectively looking at all of the data and not just the data that support action in stock prices? Let’s look at a chart that shows a positive data point.
Please click here for the annotated chart of VIX VIX. The chart compares VIX with the Dow Jones Industrial Average DJIA, S&P 500 ETF SPY, Nasdaq 100 ETF QQQ and small-cap ETF IWM. Please note the following from the chart:
• VIX is also known as the fear index. It goes up when the market goes down.
• Even though the market has gone lower, the VIX has not gone higher than the prior recent peaks.
• The VIX is much lower than the spike in February 2018.
• It’s not shown on the chart, but it is very instructive to watch the price action in VIX ETF VXX. Recently VXX tends to fall rather quickly when the intraday downward momentum in stocks such as Apple AAPL, Amazon AMZN, Facebook FB and Netflix NFLX stalls. There is also a high correlation with semiconductor stocks Nvidia NVDA, AMD AMD and Micron Technology MU.
• This indicates that there are a lot of sellers of volatility in the market.
• The sum total of the foregoing is that many sophisticated players appear to be positioning for a rally in the short term.
• From a long-term perspective, this means that weak hands have not been taken out. Typically medium-term bottoms are not formed until weak hands are taken out.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Yes, there is doom and gloom, but there are reasons for a short-term rally to develop if the news such as the government shutdown or trade issues do not get in the way….Read more at MarketWatch.
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