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The stock market is likely headed toward a new high fueled by borrowing and money printing, European leaders have agreed on a recovery plan that will cost $2.1 trillion. In the U. S., another stimulus package is likely ahead. It is out of fashion to consider how the borrowed money will be paid back. Central banks stand ready to print as much money as they want — there appear to be no constraints on the central bankers, who are not elected.
The momo (momentum) crowd is celebrating by increasingly aggressive buying of the momo stocks. Prudent investors are asking: “Is there a limit?” Let’s explore with the help of a chart.
The chart
Please click here for an annotated chart of Dow Jones Industrial Average ETF DIA, +1.14%, which tracks the Dow Jones Industrial Average DJIA, +1.16%. It is a monthly chart so investors can have a long-term perspective.
Note the following:
• The chart shows the stock market has broken out decisively above the upper band of the support/resistance zone.
• The breakout is happening as RSI is giving a buy signal. The combination of the breakout and RSI is powerful especially since RSI is not overbought. When RSI is above 70, as shown by the purple line on the RSI pane on the chart, it is considered overbought.
• The chart shows that from a technical perspective, there are no hurdles for the stock market to reach a new high.
• The chart shows progression of the Fed’s balance sheet — a fancy way of talking about money printing. Before the great recession, the Fed’s balance sheet stood at $0.87 trillion. Now it is headed toward $10 trillion.
• Not shown on the chart is that the U. S. debt is now about $26.5 trillion. When properly accounting for all the liabilities of the government, total liabilities stand at about $132.68 trillion. By some estimates, each taxpayer’s share of the liability is $860,000.
Where is the limit?
The limit is determined by the following factors:
• Inflation
• Currency depreciation
• Difficulty borrowing
• Higher interest rates
• Social unrest
• Public awakening
Right now, none of the above factors are in play for the following reasons:
• Inflation is low because of the way the government calculates inflation as well as artificially low interest rates and globalization.
• Currency depreciation has not been an issue because most governments in the world are engaging in similar policies.
• Borrowing is not an issue because there is a surplus of capital.
• Central banks are determined to artificially keep interest rates at low levels and even negative in some parts of the world.
• We are beginning to see early signs of social unrest but we are a long ways off from a revolution.
• There are no signs of public awakening of the long-term consequences.
Practical pointers for investors
What to do?
• Hold some gold in the portfolio. Take a look at these ETFs for gold GLD, +1.25% , silver SLV, +6.04% and gold miners GDX, +1.75%. A big part of our research is devoted to precise allocation levels and signals for precious metals.
• The big money is hiding in the five large-cap tech stocks of Amazon AMZN, -2.12%, Apple AAPL, -0.85%, Alphabet GOOG, +0.06% GOOGL, +0.11%, Microsoft MSFT, -0.79% and Facebook FB, -1.43%. Keep a close watch on these stocks.
• Keep a close eye on the momo crowds’ favorite stocks such as Tesla TSLA, -2.00%, Zoom Video ZM, -2.75%, Netflix NFLX, -1.69% and Peloton PTON, -2.21%.
• Accept that this is a bubble, but know that this bubble is likely to get bigger before it pops.
• Know that a lot of money is to be made as the bubble gets bigger.
• Hold on to good long-term positions but use the concept of protection bands to protect your portfolio.
• Understand the difference between strategic investing and tactical trading. Take advantage of opportunities with short-term tactical trades in addition to long-term strategic investments.
• Stay nimble and do not get locked into a bullish or bearish opinion.
• Pay attention to the election risk.
Arora Report portfolios have positions in Apple, Amazon, Alphabet, Microsoft and Facebook. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. He can be reached at Nigam@TheAroraReport.com.
