After President Trump’s tweet about a potential 10% tariff on iPhone imports from China, investors’ heightened attention to technology stocks moved a notch higher.
Becky Quick of CNBC was in tune with investor concerns, as shown in this segment, but it was my answer to the spot-on question from Andrew Ross Sorkin on tech stocks that has generated the most emails. At a time when gurus’ calls are on both bullish and bearish sides, many investors found some clarity in “Here’s how to tell if stocks will enter a bear market or rise to new highs.”
Important events are ahead. Let’s update the situation with the help of a chart.
Please click here for an annotated chart of Nasdaq 100 ETF
I chose the chart of this ETF over the Dow Jones Industrial Average
the SP 500 ETF
and the small-cap ETF
because of dominance of tech stocks in the Nasdaq 100. The four largest components in the Nasdaq 100 are Apple
Please note the following:
• The chart shows a move above the trend line. This is positive.
• The chart shows a very short-term bottoming pattern. This is positive.
• The chart shows RSI (relative strength index) divergence. In plain English, this means that although the price fell below a prior low, RSI did not go as low. This is a mild positive.
• As the chart shows, the overall pattern of RSI is positive.
• The low came on somewhat heavier volume. This is mildly positive. However, this is a low conviction point; a significantly higher volume would have increased the probability of this being a bottom.
• As the chart shows, the rally is on low volume. This is negative.
• Positive earnings from Salesforce
are creating positive sentiment.
• Smart-money flows in semiconductor stocks such as Applied Materials
and Micron Technology
have turned to neutral from negative. Smart-money flows have been positive in Intel
through most of the tech decline; interestingly, Intel has held up well during this period. Smart-money flows turned positive in AMD
at the depth of the selloff. You already know from my writings over the years that smart-money flows have a great track record. The cherry on top is that smart-money flows were negative in Nvidia
when the stock was trading around $290, momo (momentum) crowd flows were positive and it was the darling of tech investors. Smart-money flows stayed consistently negative on Nvidia, and ultimately the stock fell to as low as $133. Please see “The poster child of bull-market excess just dimmed the prospects of the broader stock market” to see how money flows provide you with an edge.
• For the medium term, the bear is ready to pounce on some high-flying tech stocks. Popular high-flying tech stocks can be cut by 50% or more from their highs, as explained here.
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.
What to do now
There are times to have high conviction because the data support it. Over the years, you have seen my calls on stocks ranging from sell everything or hedge in 2007, to go aggressively short in 2008 and then back up the truck and buy in 2009. You have also seen my calls to sell gold at $1,904 an ounce and silver at $50 an ounce, both of which turned out to be the tops.
The data do not support high conviction in the medium term at this time. In the short term, it all comes down to the Federal Reserve’s policy and the result of President Trump’s meeting with China’s President Xi, as described here.
For market timing, I follow the ZYX Asset Allocation Model, which has inputs in 10 categories. Please click here to see the 10 categories.
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.
Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and the founder of two Inc. 500 fastest growing companies. He is also the developer of the ZYX Change Method to profit from change by investing. The premise is that most money is made by predicting change before the crowd. Arora is the chief investment officer at The Arora Report and the editor of four newsletters that track the ZYX Change Method. Nigam can be reached at Nigam@TheAroraReport.com
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