Some say the celebs are aligned for a so-called Santa Claus rally.

That refers to a rise in the inventory market in the final week of December and the first two buying and selling days of January. The purpose is that low liquidity makes it simpler to push up the market. Last yr was an exception when the inventory market plunged in December.

It’s essential for buyers, nevertheless, to contemplate completely different viewpoints.

Let’s do this by reviewing a chart. Please click on here for an annotated chart of S&P 500 ETF

SPY, -0.85%

which tracks the benchmark S&P 500 Index

SPX, -0.86%.

Note the next:

• The chart reveals three factors when the relative power index (RSI) was overbought on a weekly chart.

• The chart reveals that for every of those three factors, the quantity was low.

• The left-most level on the chart reveals a rise, just like the one taking place now, in the inventory market. This rise was adopted by a decline.

• The level in the center reveals a rise just like that in the inventory market now. This rise was adopted by a massive decline.

• The chart reveals the Arora purchase sign given proper at the underside of the final decline.

• The chart reveals that the Arora long-term portfolios have been as much as 62% protected previous to the massive drop.

• The chart additionally reveals a short-term commerce in Nasdaq 100 ETF

QQQ, -1.02%

on leveraged ETF

SQQQ, +3.25%

to revenue from the decline.

• The right-most level proven on the chart is for the present inventory market. The rise in the inventory market, overbought RSI and low quantity are just like the final two instances proven on the chart. During the final two instances, the rise was adopted by a decline. This is a massive adverse.

• An overbought inventory market tends to be weak exactly at a time when not many see a good purpose for a decline, as is the case now. This is a warning flag.

• Performance chasing is on. In efficiency chasing, lagging cash managers are likely to throw warning to the wind and purchase strong-performing shares in an try to meet up with their benchmarks. This is a massive a part of shopping for that’s occurring in mega-caps reminiscent of Apple

AAPL, -1.16%,


AMZN, -1.07%,


FB, -0.96%

and Microsoft

MSFT, -1.21%.

Semiconductors have been nice performers. Stocks reminiscent of Intel

INTC, -0.67%,


AMD, -1.07%,

Micron Technology

MU, -2.36%

and Applied Materials

AMAT, -2.07%

might even see extra shopping for by lagging cash managers. This is a optimistic. For particulars, please see “‘Performance chasing’ and Trump’s impeachment process could push the Dow to 30,000.”

• An enormous a part of tax-loss promoting is already achieved. This is a optimistic.

• Investors with giant features in taxable accounts are reluctant to promote earlier than the year-end as a result of they don’t wish to pay capital features taxes this yr. This is a optimistic.

• If the momentum in the inventory market reverses, these with giant features, particularly hedge funds, could wish to promote to lock in earnings. Such promoting could speed up the downward momentum. Looking forward, this is a warning that buyers ought to maintain a cautious eye on.

• There is a important quantity of financial information forward, together with the roles report this Friday. The information have the potential to trigger a short-term blip.

• The inventory market is fixated on the part certainly one of a commerce cope with China. Dec. 15 is a vital date when new tariffs are scheduled.

• The inventory market is assuming that, at a minimal, the brand new tariffs shall be postponed and maybe the commerce cope with China shall be reached earlier than Dec. 15.

• So far China doesn’t appear to be tying the U.S. assist for Hong Kong to the commerce deal. China sees U.S. assist for Hong Kong as interference in its inner affairs. This could make China demand extra concessions from President Trump, and Trump will not be prepared to grant such concessions. If a commerce deal is just not reached and new tariffs are carried out, look out under.

• There is not any parallel to final December in phrases of the Federal Reserve. Last yr the Fed was in the mode of accelerating rates of interest. Now the Fed is on maintain. The major purpose for the massive drop in the inventory market final yr was Fed tightening.

Ask Arora: Nigam Arora solutions your questions on investing in shares, ETFs, bonds, gold and silver, oil and currencies. Have a query? Send it to Nigam Arora.

Dow 30,000 magnet

Historically, massive, spherical numbers have acted as a magnet for buyers.

When I gave a purchase sign on Trump’s election at a time when many have been predicting a massive inventory market drop, it was at first met with incredulity. When I known as for a high-probability state of affairs of the Dow Jones Industrial Average

DJIA, -0.96%

hitting 30,000 factors in Trump’s first time period, I acquired a ton of hate mail. I’ve subsequently repeated that decision a number of instances. Please see “Here’s the case for Dow 30,000 in Trump’s first term.”

Dow 30,000 is the subsequent magnet.

What does all of it imply?

Make no mistake that this inventory market is managed by the momo (momentum) crowd. Buying is happening not due to higher earnings, a higher economic system or higher geopolitics, but due to the upside momentum. Keep in thoughts that the momo crowd is fickle and may activate a dime. Investors ought to contemplate following a confirmed adaptive mannequin, such because the ZYX Asset Allocation Model that has carried out nicely in each bull and bear markets. This can also be a good time for buyers to make the most of short-term trades as alternatives come up in addition to long-term positions.

With the Dow 30,000 magnet, many long-term buyers could select to not promote till that degree is reached. When there’s a dearth of sellers, the trail of least resistance for the inventory market is up.

Disclosure: Subscribers to The Arora Report could have positions in the securities talked about in this article or could take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has based two Inc. 500 fastest-growing firms. He is the founding father of The Arora Report, which publishes 4 newsletters. Nigam will be reached at [email protected].


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