In my 30-plus years in the markets, one of the biggest mistakes I have seen investors make is to not listen to the message of the markets.
Often investors tend to force their opinions on the markets instead of listening to what the markets are telling them. This is an important concept right now because markets are highly volatile, and not listening to the message of the markets can be disastrous.
When markets are highly volatile, it is usually better to buy after the cleansing, with the exception of short-term trades. Let us explore with the help of two charts.
Please click here for a chart of the S&P 500
Similar conclusions can be drawn from the charts of Dow Jones Industrial Average
Nasdaq 100 ETF
and small-cap ETF
Please click here for a chart of S&P 500 futures published at the time of the market dip in February. For the sake of transparency, this chart is exactly the same as previously published.
Please observe the following from the charts:
• The recent rally is on low volume.
• The 1,000 DJIA point rally occurred from a condition that was not oversold, as shown on the chart.
• The recent market downdraft has been accompanied by low volume.
• The February downdraft was accompanied by heavy volume, as shown on the chart.
• During the February downdraft, the market rallied from an oversold condition.
• During the February downdraft, the relative strength index (RSI) formed a double bottom.
• During the February downdraft, the market formed a “w” pattern visible on the futures chart, linked above. A “w” pattern is short-term bullish. As the pattern forecasted, the market rallied in the short term.
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Market has not been cleansed
The sum total of the observations from the charts is that the market has not yet been cleansed. A cleansing would have occurred if the volume were heavy, the market rallied from an oversold condition, a bullish pattern such as a “w” formed and sentiment became negative. None of those conditions have been met.
Macro and fundamentals
Both the macro and fundamental pictures have become cloudy, in contrast with all the sunshine last year.
Under these conditions, it is important for investors to protect their portfolios. To learn how, please read “Worried about the stock market dropping? Here’s how to protect your nest egg.”
Popular tech stocks
Many investors have become overly concentrated in FAANG stocks. FAANG stocks are Facebook
To make matters worse, in the name of diversification, many investors have added stocks such as Micron Technology
Those stocks tend to move together.
All investors would be better off by bringing in some sophistication to their portfolios. To learn how, please see “How to know when to buy, sell or hold popular tech stocks today.”
What to do now
We provide specific detailed guidance to The Arora Report subscribers in the form of cash levels, hedges, profit taking and positions to hold. In general, consider increasing cash and adequate hedges while maintaining good long-term positions.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.