The federal government gone berserk might be the biggest threat to the stock market

Almost endless stimulus and bailouts could eventually capsize the economy

Warner Bros/Everett

Some investors believe the rules of risk and reward have been suspended, as the U.S. government borrows heavily and the Federal Reserve prints money to prop up the economy.

A dangerous connection is forming between stock market investors and politicians gone berserk.

There are many stimulus proposals from both Democratic and Republican politicians. An example is the Monthly Economic Crisis Support Act offered by Sens. Bernie Sanders, Kamala Harris and Ed Markey. The bill would send as much as $10,000 a month to families.

The cycle of politicians borrowing and money printing, and investors buying stocks is right in front of our eyes. This is dangerous in the long term, as the debt has to eventually be paid off. It does, of course, provide us with money-making opportunities in the short to medium term. 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
which tracks the Dow Jones Industrial Average

Please click here for an annotated chart of the S&P 500 ETF
which does the same for the S&P 500

Note the following:

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

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

• The first chart shows that, so far, the stock market has not been able to break through the resistance zone after bouncing from the top band of the “mother of support zones.”

• The second chart shows RSI (relative strength index) divergence. In plain English, this means that as the stock market has risen, RSI has fallen. This indicates a loss of internal momentum.

• Investors have been hiding in five big stocks: Amazon


and Microsoft
Investors may want to carefully watch how these five stocks react to news. For example, as of this writing, there is a rumor that Amazon may buy AMC Entertainment
Read: “Investors have $5.1 trillion hiding out in the shares of five companies, which will be tested this week.”

• Investors should pay attention to the potential of negative interest rates in the U.S. Read: “Stock market investors are oblivious to the potential calamity of negative interest rates.”

What does it all mean?

Based on my three decades in the markets, I suggest that investors neither be bearish nor bullish, but evaluate the data as they come. Investors ought to follow the framework of protection bands and strategic buying when stock and ETFs dip into buy zones. In addition, investors who are trading-oriented should consider taking advantage of short-term opportunities when the setups are right. Please see “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide” to learn more.

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

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