It is no secret that the stock market is driven by greed and fear. Normally I measure levels of greed and fear in the market using proven algorithms. At extremes, greed is a sell signal and fear is a buy signal for stocks.
The reaction to the coronavirus shows that there is an unprecedented amount of arrogance among the momo (momentum) crowd and the people who influence them. The stock market these days is controlled by the momo crowd. This combination of greed and arrogance may prove to be dangerous for investors. Let’s examine the danger with the help of two charts.
Please click here for an annotated chart of the SPDR Dow Jones Industrial Average ETF Trust DIA, -2.12%, which tracks the Dow Jones Industrial Average DJIA, -2.09%. For the sake of full transparency, this chart was previously published and nothing has been changed since then.
Please click here for an annotated intraday chart of the Invesco QQQ Trust QQQ, -1.59%, which tracks the Nasdaq-100 Index NDX, -1.58% . Similar conclusions can be drawn from the chart of the SPDR S&P 500 ETF SPY, -1.82%.
Note the following:
• Smart money sold into the strength when the momo crowd proclaimed that the coronavirus was not of concern and the tiny dip in the stock market was a buying opportunity.
• The first chart shows that the trendline that has been in place during the latest acceleration in the stock market was broken on the coronavirus news.
• The first chart shows the support zone. If the stock market pulls back to the support zone, it may make sense to think in terms of buying opportunities.
• The first chart shows the Arora signal to raise cash and hedges near the highs in the stock market before the breakdown on coronavirus news. Based on this signal, the Arora Report long-term portfolios have been up to 63% protected.
• The first chart shows Arora signals to short-sell QQQ for a short-term trade. For those who could not short the signal was also given to buy the ProShares UltraPro Short QQQ ETF SQQQ, +4.89%. This inverse ETF goes up when the stock market goes down. (Bear in mind that short-selling and leverage ought to be used only by sophisticated investors.)
• The first chart shows RSI divergence. This is a negative.
• The second chart shows the gap down on the coronavirus news.
• The second chart shows proclamation of a buying opportunity by the momo crowd.
• The VUD indicator on the second chart shows aggressive buying after the momo crowd gurus proclaimed that the coronavirus was not of concern. The VUD indicator is the most sensitive measure of net supply demand in real time.
Since the coronavirus news, Apple AAPL, -4.43% and Microsoft MSFT, -1.48% have reported exceptionally strong sales and earnings. However, both of these success stories should have already been discounted in the elevated stock prices.
Semiconductors have been the leading indicator of this stock market. Among semiconductors, Advanced Micro Devices AMD, -3.65% and Xilinx XLNX, -3.12% reported weaker than expected earnings but Lam Research LRCX, -4.10% did better than expected.
Greed and arrogance
Most investors are familiar with greed. Please see How an external event could stunt U.S. stocks for the level of greed.
Would you say that there is extreme arrogance after considering the following points?
• The momo crowd, who are not virologists or epidemiologists, quickly declared that coronavirus was of no concern.
• Such proclamations happened at a time when epidemiologists and virologist were concerned.
• It was known that the virus had an incubation period of up to two weeks.
• It was known that asymptomatic patients were contagious.
• It was known that about 5 million people managed to flee the epicenter of the virus and were not likely to be tracked.
• There were serious concerns about the transparency of the information coming out of China. After all, no government would want to spread panic. It would seem to be in a government’s interest to skew the statistics to minimize the impact.
• The buy signals were being given only after a pullback of only 2% to 3%, following a massive rally.
I previously wrote that there was 90% probability that the virus would be contained but investors should not ignore the small probability of a significant spread.
Consider watching the SPDR Gold Shares ETF GLD, +0.58%, the iShares Silver Trust SLV, +0.84% and the United States Oil Fund LP USO, -2.17%. For details, please see Watch these stocks and ETFs to gauge the impact of the coronavirus on markets.
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. He can be reached at Nigam@TheAroraReport.com.