There are three key questions for stock investors now: How to avoid losses, where is the support, and is the market oversold? Letâs explore with the help of two charts.
Please click here for the chart of money flows in 11 popular tech stocks. Tech stocks have been the market leaders. Therefore, it makes sense to pay the most attention to tech stocks. For the sake of transparency, this chart was first provided to the subscribers of The Arora Report on Sept. 25 when the market was flying high. Subsequently, it was published in MarketWatch. Please see âFear of October is creeping into money flows in 11 popular tech stocks.â
Please click here for the annotated chart of S&P 500 ETF
Similar conclusions can be drawn from the charts of the Dow Jones Industrial Average
Nasdaq 100 ETF
and small-cap ETF
Please note the following from the charts:
â¢ The chart shows that The Arora Report added short-term hedges on Sept. 7. Now, those hedges have not only added protection but they are profitable. We are beginning to book profits on those hedges now.
â¢ The chart shows the Arora call on âfear of Octoberâ based on smart money flows on Sept. 25.
â¢ The chart shows the support zone. As of this writing, the market is right at the top band of the support zone. The most likely scenario is for the market to bounce from the support zone.
â¢ RSI (relative strength index) shows that the market is oversold. This indicates that the market should bounce. Perhaps after a deeper excursion into the support zone.
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Here are some things we did that you can do in the future.
â¢ We held 21%-31% cash.
â¢ We held medium-term hedges of 10%-15%.
â¢ We held short-term hedges of 10%-15%.
â¢ We underweighted high-beta stocks and ETFs. (High-beta stocks are more volatile than the broader market.) At this time, all of our long portfolios are drastically underweight in high-beta stocks and ETFs. Most investors are overweight high-beta.
The FAANG stocks Facebook
are high-beta stocks. Amazon and Netflix tend to have the highest beta among those stocks. Other popular tech stocks such as Square
are also examples of high-beta stocks.
â¢ We hold select short positions. Short positions provide gains when the market falls.
â¢ We hold an inverse ETF that selectively short-sells highly touted stocks. This ETF goes up when the highly touted stocks fall.
â¢ Use a comprehensive model with a proven track record in both bull and bear markets. An example is the ZYX Asset Allocation Model. The model has 10 inputs. Please click here to see the 10 inputs. The model went to 100% cash and hedges in 2007 before the market crash of 2008. In 2008 the model added inverse ETFs and aggressive short positions for those who could short. In March 2009, the model went aggressively long in buying stocks and has kept on the bullish side, often taking somewhat defensive positions with hedges. In 2008, when most portfolios lost one-half of their value, The Arora Report produced a return of 45.9%.
We update daily recommended cash levels and hedges. As an example, after the decline, we are taking profits on hedges.
The foregoing provides a road map for all investors to avoid stock market losses with real examples.
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.