The coronavirus is spreading. The stock market is under pressure. Investors are reacting — badly.
The No. 1 mistake investors are making now in the wake of coronavirus has to do with their artificial construct of the true nature of the stock market. Reality and this construct simply do not work well together.
Before discussing this mistake, let’s first build the necessary background so it can be fully understood.
For the sake of full transparency, both charts were previously published and no changes have been made.
Note the following:
• The first chart shows the Arora buy signal on Christmas Eve 2018. At that time, the stock market had fallen about 20%. Now with hindsight, Christmas Eve 2018 turned out to be the low before a major rise in the stock market. However, on that day, panic was setting in, and most analysts were giving sell signals.
• The second chart drills down in detail on the subject that is most important to investors right now.
• The second chart shows that when the market first fell, the Arora call was that the market was not likely at the low. At that time, the stock market had fallen by a certain percentage that was prompting many investors to buy stocks.
• After the first low, the stock market staged a rally. As shown on the second chart, when it fell again, many investors who missed buying the previous time were buying again because the stock market had fallen by a certain percentage.
• The second chart shows that at the time of the second decline in the stock market, the Arora call was that it was not the likely low point.
• Subsequently, there was a significant further fall in the stock market that led to the Arora buy signal at the very low.
• The first chart shows three support zones. For more details of these support zones and other important items related to the first chart, please see “Buffett is bullish on stocks but says the market can drop 50% — is he wrong?”
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 artificial construct
The artificial construct that investors employ is the concept of percentages. Recently, investors bought when the market fell 5%. Some held out until their favorite stocks, such as AMD AMD, +2.69% and Micron Technology MU, +3.57%, fell 7%, only to find them drop much further. Some now aim to buy at a 10% decrease in the stock market.
Remember: The stock market does not know percentages. Percentages are simply an artificial construct that is leading investors to make the No. 1 mistake they are making now.
How to avoid this mistake
Instead of using percentages, consider doing some of the following:
• Clear your mind of the artificial construct of percentages.
• Get your emotions in a neutral zone.
• Focus on listening to the message that the market typically sends loud and clear. Most investors are not able to hear this message because they are too caught up in percentages, emotions and opinions.
• At The Arora Report, we use the adaptive ZYX Asset Allocation Model with inputs in 10 categories and a variety of sophisticated algorithms. However, investors can do well even without a proven sophisticated model.
• Consider paying attention to support zones shown on the first chart.
• Consider paying attention to price action on intraday charts.
• Watch put/call ratios on indexes.
• Watch China travel stock Trip.com Group TCOM, +3.02%.
• Watch volume for a washout.
• Watch for sentiment to become extremely negative.
• Listen to statements by Federal Reserve officials.
• Watch actions of the People’s Bank of China.
• Watch patterns traced by RSI (relative strength index), especially divergences as shown on the charts linked above.
Instead of being led by percentages of stock declines, tune in to at least some of the items above and let them guide you.
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.