As the stock market rallies, put protections on your investing portfolio

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First and foremost, the sole purpose of me writing this column is to help investors, who are anxious as the coronavirus spreads. An important piece of information that investors should have had is news around coronavirus-testing kits.

First, let’s look at a chart to develop the necessary background to understand this piece of information on the stock market.

Chart

Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA, +2.91%, which tracks the Dow DJIA, +3.04%.

Note the following:

• The chart tracks monthly changes, something that is of great value to long-term investors at this time.

• The chart shows a trendline from the start of this massive bull run in the stock market to the present.

• The chart shows that the stock market deviated from the long-term trendline (at the first “Arora buy signal,” which was given when Donald Trump was elected).

• The chart shows that even after the recent drop in the stock market, the market is still levitating significantly above the long-term trendline shown on the chart.

• The chart shows that the RSI (relative strength index) is still not oversold even after this big drop in the stock market. The chart shows a white horizontal line that marks the point where RSI gets oversold. RSI has a way to go before it gets oversold. In plain English, this means that the stock market will have to fall further before the natural buying that comes in when the stock market is oversold occurs. This is a negative from a long-term perspective.

• The chart shows that the volume is not high. This is a negative.

• This is a long-term perspective and not intended to call daily fluctuations.

• From a long-term perspective, investor portfolios are overly concentrated in five big companies: Apple AAPL, +7.28%, Amazon AMZN, +2.63%, Facebook FB, +0.55% and Alphabet GOOG, +2.04% GOOGL, +1.95%. This is a negative.

• Investors ought to consider reading “Prudent investors should look at these four stock charts as coronavirus spreads.”

• Investors should stop thinking in terms of percentages. Please see “This is the No. 1 mistake investors are making now — here’s how to avoid it.”

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.

Coronavirus scandal

Reports of coronavirus emerged as early as November 2019. Unfortunately, many of the reports seem to have been deleted.

China alerted the World Health Organization (WHO) about several unusual pneumonia cases Dec. 31. On Jan. 7, 2020, coronavirus was identified. On Jan. 11, the first death in China from coronavirus was announced.

We are now in March. So far in the United States, only a tiny fraction of the people who should have been tested for coronavirus have been tested. The availability of test kits in the U.S. has been extremely limited. Further, the policy on who should be tested has been restrictive.

Testing for coronavirus is not difficult. It has not been an issue of science and technology but an issue of policy and execution. Other countries such as South Korea have been able to test a large number of patients in a very short time, but not the U.S. “Scandal” is a strong word, but what else can you call lack of testing in the United States? It may not be politically correct, but investors ought to call a spade a spade to develop the proper perspective for the current stock market conditions.

Now the policy is being changed, and more people will be tested. Hopefully tests will become widely available.

Investors have been driven by the number of reported cases and deaths. Ask yourself a simple question: “Are the number of reported cases likely to go higher or lower as the test for coronavirus becomes widely available?” You know the answer: The probability is high that the number of reported cases will dramatically increase. Certainly the number of reported cases will not decline any time soon.

Moreover, history tells us that virus infections come in waves. We are just seeing the first wave in the United States. A vaccine is far away. The hope is that an antiviral will be found soon.

What does it all mean?

The Federal Reserve is likely to reduce interest rates, and other central banks are likely to join in. As a result, the stock market may rally.

The “buy the dip” mentality is alive and well. Expect the momentum (momo) crowd to buy this dip. The momo crowd is likely to buy speculative stocks such as Tesla TSLA, +8.83% and Virgin Galactic SPCE, +8.66%. Semiconductor stocks have been the leading indicator. Consider watching semiconductor stocks such as AMD AMD, +3.08%  and Nvidia NVDA, +1.43%.

Unless a cure is found for the coronavirus, prudent investors ought to increase the protection of long-term portfolios on rallies in the stock market. Increasing protection means a variety of measures including raising more cash, short-term hedges, medium-term hedges, more diversification and reducing concentration. Prudent investors should also consider taking advantage of short-term trading opportunities.

Caution

Nothing is cast in stone. The stock market is dynamic. It is important to stay up-to-date with new developments and not act based on preconceived opinions. The foregoing call to increase protection on rallies is subject to change. Please see “Buffett is bullish on stocks but says the market can drop 50% — is he wrong?

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.

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