How to navigate the stock market when ‘all news is great news’ to care-free investors - MarketWatch

By Nigam Arora

Published: Apr 30, 2020 10:30 am ET

Investors have pushed up tech stocks, including Facebook, even as surging jobless claims show the economy is wrecked

Weekly jobless claims were published Thursday and, again, the total was ugly: 3.8 million.

I have witnessed periods when the stock market believes bad news is good news, and good news is great news. At this time, the “hopium” in the market has turned into something quite different from most euphoric periods, which previously had led to crashes: All news is great news.

Read: Jobless claims climb 3.8 million in late April to push coronavirus total to 30 million

How should prudent investors navigate this stock market? Let’s explore with the help of three charts.

Charts

Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA-1.49% which tracks the Dow Jones Industrial Average DJIA-1.46%

Please click here for an annotated chart of the S&P 500 ETF SPY-1.26% which does the same for the S&P 500 SPX-1.3% compared with several securities.

Please click here for an annotated chart of Facebook FB+5.16% stock.

Note the following:

• Investors should consider analyzing the stock market in multiple time frames. Please see “The biggest mistake stock market investors are making now — failing to look ahead.”

• The first chart is monthly, giving a long-term perspective. It should be the starting point of all analysis.

• The second chart is daily, giving a short-term perspective.

• The third is a five-minute chart, giving a very short-term perspective.

• The first chart shows that the stock market is at the lower band of the resistance zone. This is a high-risk area. Historically, after a small penetration, there is a high probability of a reversal. This is exactly what was likely to happen before good news on Gilead’s GILD-0.3%  remdesivir treatment for coronavirus was released. Please see “Gilead’s news saved the day for the stock market, which is in a high-risk area.”

• The third chart shows a strong increase in Facebook after the company reported earnings. Investors focused on earnings stabilizing in April and higher engagement numbers. After all, people across the world are stuck at home — what else did investors expect other than more people visiting Facebook more often? The second chart shows that Facebook stock had run up going into earnings.

• Investors ignored the simple fact that Facebook does not charge people to use the social-media service. Facebook makes money from advertisers. What did Facebook have to say about advertisers? The answer: Falling advertising, lower ad rates and lower profit margins this year. What did investors do in response to these negative comments? They, of course, bought the stock.

• The third chart shows the VUD indicator, which is the most sensitive measure of net supply and demand in real time.

• The third chart shows that at least in the case of Facebook for the period shown on the chart, sanity among investors had not completely gone out of fashion. The chart shows that there was some net selling, as has recently been the case in many stocks, such as Twitter TWTR-6.85% and Alphabet GOOG-0.89% GOOGL-1.03%

• Before you send me hate mail, please know that The Arora Report bought Facebook at $49.92 and is still holding the position in the Model Portfolio. Moreover, in March, Facebook fell to the low of about $137 in the Arora buy zone before bouncing back.

• The second chart compares the S&P 500 to shares of Apple AAPL+0.76% Amazon AMZN+2.15% Facebook, Microsoft MSFT-0.01%  and Alphabet.

• The second chart shows that during the stock market swoon, four of the five big tech stocks fell into Arora buy zones, giving investors opportunities to buy at attractive prices.

• The second chart also shows that the strategy of buying value stocks has failed this year. Value has no place in the new stock market hopium; only momentum counts.

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.

What does it all mean?

Investors ought to follow the framework of protection bands, strategically buy when stock and ETFs dip into buy zones and nibble only when there is a pullback or a decisive breakout. In addition, investors who are trading-oriented should consider taking advantage of short-term opportunities when the setups are right. Please see “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide.”

Answers to your questions

Answers to some of your questions are in my previous writings. You can access them here.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

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