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President Trump acted where his two immediate predecessors, presidents Obama and Bush, apparently punted by killing Iranian Gen. Qassem Soleimani.
After Soleimani was killed and the stock market was falling, I said his death may not be as significant for the stock market as it seems. Now Iran has retaliated by shooting missiles on bases in Iraq where American soldiers are stationed.
Let’s figure out what is next for investors in the stock market with the help of three charts.
Charts
Please click here for an annotated chart of oil futures CLG20, -3.80%. I am not using the chart of popular oil ETF USO, -3.62% because it does not trade around the clock.
Please click here for an annotated 25-year chart of S&P 500 ETF SPY, +0.52%, which tracks the benchmark S&P 500 Index SPX, +0.49%.
Please click here for an annotated chart of Apple AAPL, +1.61% stock.
For the sake of transparency, the second and third charts have been previously published and no changes have been made.
Note the following:
• Since most investors watch the Dow Jones Industrial Average DJIA, +0.56%, it is worth noting that so far there has not been a significant move in the Dow.
• The first chart shows a big spike in oil when the news of retaliation by Iran hit.
• The first chart shows the volatility in oil near the highs when smart investors started to speculate that Iran did not want war as the retaliation was measured.
• The chart shows oil falling as latecomers figured out that Iran did not want war.
• The chart shows that oil took another leg down when there was no immediate U.S. retaliation.
• The first chart shows that oil broke support on speculation that Trump will let this pass and de-escalate the situation. In plain English, oil is lower as of this writing compared to where it was before Iranian retaliation.
• The probability is very high that Trump may choose to de-escalate, but investors should not be complacent because Trump is unpredictable.
• The probability is very high that Iran will continue to de-escalate, but investors should not be complacent because the Iran regime is clever; more attacks may come in different forms.
• The second chart is a 25-year look at the stock market. It is important to see how far the stock market has come. It is simply common sense to stay bullish but to have defensive measures in place to protect portfolios. At The Arora Report we provide precise cash levels and hedges to hold in addition to positions to hold and buy.
• Of importance on the second chart of the stock market is RSI (relative strength index) divergence. In plain English, it means that as the stock market has reached new highs, it is losing its internal momentum.
• Loss of internal momentum is significantly more important than it seems on the surface because this market is controlled by the momo (momentum) crowd. The momo crowd keeps on buying not because valuations are low or because the macro picture is getting much better or earnings are rising fast, but because the stock market is simply going up. Most analysts would not dare tell you this simple truth.
• The third chart is that of Apple stock. The Apple stock chart is extremely important because Apple carries a heavy weight in indexes and ETFs such as Nasdaq 100 ETF QQQ, +0.75%.
• Apple stock has shown an extraordinary rise.
• Apple stock, in part, has been driven by sentiment. It is true that Apple is successfully making a transition to services and this has led to a higher price-to-earnings (P/E) ratio.
• Over five years ago, I projected that Apple would get more into services and, as a result, get a higher P/E. Now that has happened. Even if oil prices rise, Apple is not going to stop its move into services. However, the shift in sentiment could drive the stock lower.
• In addition to Apple stock, large-cap tech stocks such as Amazon AMZN, -0.78%, Facebook FB, +1.01%, Google parent company Alphabet GOOG, +0.79% GOOGL, +0.71% and Microsoft MSFT, +1.59% have played a big part in the stock market rise. It is important for investors to keep an eye on price action in those four stocks.
• The lifeblood of the modern economy is semiconductors more than oil. Among semiconductors, demand for DRAM and NAND memories are good indicators. Samsung SSNLF, +0.00% is a big supplier of memory. In newly released earnings, Samsung is making positive comments about memory. For U.S. investors, the two stocks that are easier to trade are Micron Technology MU, -1.29% and Western Digital WDC, +1.45% to reflect demand for memory.
• Investors should keep a close eye on the stock of AMD AMD, -0.87%, as it has been a darling.
• Investors should also keep an eye on short squeezes. Short squeezes create artificial demand but provide a good real-time indication of sentiment that everyone can easily follow. Two short squeezes happening as of this writing are Tesla TSLA, +4.90% stock and Apache APA, +0.68% stock.
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.
The danger
As I have written before, the real danger to investors is not a war with Iran but the simple fact that this stock market is controlled by the momo (momentum) crowd. A big part of the buying has occurred just because the market is going up. The momo crowd is fickle and can easily start selling if momentum reverses. For this high valuation, fundamental and macro underpinnings are weak for this stock market.
Investors ought to rely on proven adaptive models with a good track record in both bull and bear markets. A good example is ZYX Asset Allocation Model. Please also read “10 things stock market investors ought to watch out for in January,” and do not become complacent. Keep appropriate defensive measures in place.
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 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.
