Daily Outlook

The stock market is in a bubble

Investors are asking me how high can this stock market go. The July employment report, released Friday, is providing a relief for the stock market. Nonfarm payrolls came at 1.46 million. Normally I compare economic data with the consensus forecast. In this case the forecasts were all over the place. The key point is that optimists have proven to be right.

Let’s explore the key question of how high the market can go.

• A chasm is developing between what stock market analysts say and what they know. To save their careers, analysts have no choice but to follow the momo crowd in the stock market. These days analysts’ calls have often become a case of the tail wagging the dog. Human nature as it is, anything can be justified.

• Being independent, I have been able to call a spade a spade — the stock market is in a bubble but the bubble is likely to get bigger. This call is based on macro and fundamentals.

• Under these circumstances, technical analysis is invaluable. The chart shows the measured target for the S&P 500 is about 3,800 points.

• The measured target is produced by excluding the time period encased in a red rectangle on the chart. The reason for excluding this is because this period is characterized by the one-time abnormal occurrence of the coronavirus.

• If the period shown by the red rectangle is not excluded, the measured target would be much higher.

• The chart shows that The Arora Report correctly called that the virus would hurt stocks prior to the decline in the stock market. Please see “How the coronavirus scare has driven dangerous arrogance and greed in the stock market.”

• Buy zones are powerful. They often give investors opportunities to buy good stocks and ETFs at great prices. The chart shows that many stocks and ETFs fell into Arora buy zones during the market swoon. For example, Apple could have been bought as low as $212.61 in the Arora buy zone, and is trading at $452.96 as of this writing. Microsoft could have been bought as low as $132.52 in the Arora buy zone, and it is trading at $215.07 as of this writing.

• The chart shows that RSI (relative strength index) is overbought but has room to go higher.

• It is important to note that the Nasdaq 100, represented by the Invesco QQQ Trust, has significantly over-performed relative to the S&P 500 and Dow Jones Industrial Average. This is due to the heavy weighting of five mega-cap tech stocks Apple, Microsoft, Amazon, Facebook and Alphabe. Big institutions are hiding in the presumed safety of those stocks. Watch them closely for clues for what is next in the stock market.

• Consider watching popular momo stocks such as Fastly and Datadog. The momo crowd ran them up to unrealistic heights prior to their earnings reports this week and is now suffering massive losses.

Opportunities abound
A lot of money is to be made in an environment like this. Consider using the concept of protection bands to protect your long-term portfolios. In addition, consider opportunistically taking advantage of short- to medium-term opportunities as they arise. As a note of caution, the risk is much higher than generally believed. It is important to be nimble, have access to proven, independent sources and have risk-control measures in place.

Consider buying a proper allocation of gold as an insurance policy. However, gold is very overbought in the short term and vulnerable to a pullback. The two gold ETFs to consider are SPDR Gold Shares and iShares Gold Trust, depending on a set of specific criteria.

The stock market is in a bubble — but the bubble is likely to get bigger, MarketWatch, Aug 07

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