Stock market could get spooked if opening the economy means more deaths

Careful investors should consider taking some profits


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Societal values change over time.

“Life, liberty and the pursuit of happiness” is in the Declaration of Independence. The response to the coronavirus and stock market actions have shown that some have adopted new values: “Money, some liberty and the pursuit of more money.”

America is in the process of opening up its economy, even though in many areas deaths from the deadly virus are rising. Our own president says that even if more Americans get sick and die, the country must reopen.

Here is a key question for stock market investors: Have American values changed permanently? And will stock market excitement go away if more Americans get sick and the level of deaths remains high?

Let’s explore with the help of two charts.

Two charts

Please click here for an annotated chart of the Dow Jones Industrial Average ETF
DIA,
+0.03%
,
which tracks the Dow Jones Industrial Average
DJIA,
-0.05%
.

Please click here for a chart of the S&P 500 ETF
SPY,
+0.13%
,
which does the same for the S&P 500
SPX,
+0.10%
,
compared with four securities.

Note the following:

• The first chart gives investors a long term-perspective.

• The second chart gives investors a short-term perspective.

• The first chart shows that the stock market opened in May below the low band of the resistance zone and is now threatening to penetrate the resistance zone.

• Ideally, new strategic buying should take place if either the stock market pulls back to the support zone or goes above the resistance zone.

• Under these market conditions, it is important for prudent stock market investors to differentiate between strategic buying and selling versus tactical actions.

• The second chart shows that, year-to-date, American Airlines
AAL,
-3.31%

stock is down 67%, Disney
DIS,

stock is down 32%, Amazon
AMZN,
+0.67%

stock is up 22% and the Nasdaq 100 ETF
QQQ,
+1.18%
,
which represents the Nasdaq 100
NDX,
+1.18%
,
is slightly positive.

How to navigate

All investors are situated differently.

Those who believe the shift in American values is permanent, are underinvested or cannot resist the temptation may consider buying stocks and ETFs that are not outliers from a band surrounding the S&P 500. For example, in the second chart, American Airlines and Amazon would be considered outliers, but the QQQ ETF and Disney would merit buying.

It is true that Disney stock is about 25% higher compared to when it dipped into the Arora buy zone, as shown on the second chart. It is also true that Disney reported earnings less than the consensus and suspended its dividend. There are many unknowns ahead for Disney, but if you are a believer in the stock market going up due to the economy opening, Disney has an unmatched set of assets. Disney has received permission to open its park in Shanghai. Disney’s dip may be a buying opportunity for those who believe in the economy-opening story.

Buying the QQQ ETF is a safer way than buying the high-flying Amazon, again only for those who have bought into the narrative of stocks going higher or are underinvested. As a note of caution, scale into those stocks and ETFs.

The foregoing is for those who believe in the permanent shift in American values. It goes without saying that those who think the value shift is transitory may consider taking some profits to take advantage of the rally.

Those who are comfortably situated within the protection bands for their long-term portfolio may consider taking no strategic action. To learn about protection bands, please see “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide.”

All investors should consider taking advantage of short-term trading opportunities and nibbling when signals are given.

Answers to your questions

Answers to some of your questions are in my previous writings. Please click here for details.

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 the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

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