If stock bulls opened their eyes, they could see not all is well in the market

What is there not to be bullish about, they say?

To start, what about states that are opening up and seeing an increase in new coronavirus cases? This may not matter to them because their new motto is “Money, some liberty and the pursuit of more money.” Please see “Stock market could get spooked if opening the economy means more deaths.”

Anything could happen in science and government that could easily dampen the enthusiasm for stocks.

For example, there is a new coronavirus research paper out: “Spike mutation pipeline reveals the emergence of a more transmissible form of SARS-CoV-2.” The mutation is resulting in a higher viral load and the evasion of existing antibodies. In plain English, this means that those who suffered from a different strain may not be immune to the new strain.

We will be seeing lots of news about the virus and treatments and vaccines for it. Some positive, some negative.

On the positive side, the Food and Drug Administration has cleared Moderna’s MRNA, +8.54% Phase 2 coronavirus vaccine study to proceed.

How should a prudent investor put all this together?

Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA, +0.76%, which tracks the Dow Jones Industrial Average DJIA, +0.76%.

Please click here for a daily chart of the ETF.

Please click here for an annotated chart of the S&P 500 ETF SPY, +1.05%, which does the same for the S&P 500 SPX, +1.00%.

Note the following:

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

• The first chart shows that the stock market has been up against the lower band of the resistance zone for a while.

• The second chart shows that as the stock market has bumped against the lower band of the resistance zone, it has been confined to a narrow range. The chart provides the clarity that debunks the narrative that the stock market is running up every day. However, this can change quickly at any time.

• The third chart compares S&P 500 ETF with the Dow Jones Industrial Average ETF and equal-weighted S&P 500 ETF RSP, +1.65%.

• Note that SPY is down about 11% for the year, but RSP is down about 21% for the year. The reason is that SPY is capitalization-weighted and therefore places more emphasis on Amazon AMZN, +0.09%, Apple AAPL, +0.82%, Microsoft MSFT, +0.24%, Alphabet GOOG, +1.37%GOOGL, +1.34% and Facebook FB, +0.73%.

• The conclusion to be drawn is that, if a handful of large-capitalization stocks are excluded from the analysis, the stock market is not running up like the present popular narrative says it is. That pokes a hole in bulls’ thesis.

The big mistake

The big mistake that many investors are making is that they are believing in a binary outcome. One should never identify as a bull or a bear.

Investors should plan for a wide range of outcomes and use a framework that employs probabilities. Please see “Warren Buffett says to ‘bet on America’ — here’s one prudent way to do it.”

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 [email protected].

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