U.S. President Donald Trump and Chinese President Xi Jinping have declared a trade truce. And stock market bulls are encouraged. So this is a good time for prudent investors to look ahead and plan.
Before I discuss a potential plan, let’s start with a chart. Please click here for an annotated chart of the SPDR Dow Jones Industrial Average ETF DIA, -0.13% For complete transparency, this chart is unchanged from the prior publication. Similar conclusions can be drawn from the charts of SPDR S&P 500 ETF SPY, -0.07% and Invesco QQQ Trust QQQ, -0.03% which tracks the Nasdaq-100 Index NDX, -0.01% :
• The chart shows the first target for the Dow Jones Industrial Average of 29,000.
• The chart shows the second target for the Dow Jones Industrial Average of 32,000.
• The chart shows the Arora buy signal.
• The move up is not likely to be in a straight line, notwithstanding the euphoria after the trade truce.
• The stock market is assuming that a good trade deal is ahead.
• The stock market is also assuming aggressive interest-rate cuts by the Federal Reserve.
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A good deal is unlikely
After having studied the reporting related to the trade truce, I think there is no indication that China is willing to budge on its long-term goals. Here are the key points:
• The trade truce gives China more time.
• China will use this time to reduce its dependence on the United States. As an example, China is likely to focus on semiconductors that are now dominated by American companies such as Qualcomm QCOM, -0.54% Advanced Micro Devices AMD, -0.58% Micron Technology MU, -0.95% and Applied Materials AMAT, -1.94%
• After China becomes stronger, it will have less incentive to give in to U.S. demands.
• The U.S. presidential election date will draw closer.
• Trump will be faced with a decision to accept a bad trade deal and keep the U.S. economy humming or not having a trade deal, harming the U.S. economy just before the election.
• The stock market is myopic, as it is controlled by the momo (momentum) crowd these days.
• Trump has made the stock market an important gauge of his success.
• The stock market will be demanding a deal — good or bad.
• Apple’s AAPL, +0.55% stock is the big beneficiary of the trade truce. Other large-cap popular tech stocks such as Facebook FB, +0.66% Alphabet GOOG, +0.47% GOOGL, +0.41% and Amazon.com AMZN, -0.55% are moving up with the general market bullishness but have no significant business in China.
For those reasons, a bad deal now has the highest probability. Investors also shouldn’t rule out a fairly high probability of no deal because Trump may decide to focus on the long-term good of the U.S.
While considering the above points, keep in mind that the stock market is assuming a good deal. In our analysis at The Arora Report, the probability of a good deal is low. Why should you focus on the probabilities? The answer lies in Arora’s Third Law of Investing: Making investing and trading decisions based on probabilities is the only realistic and profitable approach.
The Federal Reserve
Investors are anticipating 75 basis points of cuts to the federal funds rate this year and more cuts next year. Please see “There’s a big flaw in stock-market bulls’ logic.”
Read: Investors are nuts to think a July interest-rate cut is a slam dunk
The plan
Please start out by reading “The U.S. stock market is like a drunken party — stay for a while but know when to leave.” At The Arora Report, our success is partly attributable to the adaptive (automatically changes with market conditions) ZYX Asset Allocation Model with 10 inputs. Please click here to learn about the 10 inputs. Here are the key elements of the plan:
• Be more tactical and less strategic.
• From a strategic perspective, slowly raise more cash and increase hedges as the market goes higher.
• For the time being, keep on holding good long-term positions in a highly diversified portfolio.
• From a tactical perspective, be willing to make adjustments around key economic data points. For example, in July such data points may be around the employment report, ISM numbers and GDP report.
• Earnings season is ahead. Take advantage of the opportunities provided by the earnings surprises.
• Focus on emerging markets that will benefit such as India, Vietnam and Indonesia.
• More use of evergreen strategies. Please see “Here’s an evergreen strategy to make money in a volatile stock market.”
• Take advantage of short-term trading opportunities as they become available.
• Keep a close eye on the SPDR Gold Trust ETF GLD, +0.55% and these leveraged, inverse precious metal ETFs: The Direxion Daily Gold Miners Index Bull 3x Shares NUGT, +3.65% and the Direxion Daily Gold Miners Index Bear 3x Shares DUST, -3.81% Please see “Gold may be entering a binary event as Trump-Xi are set to meet.” Warning: Leveraged funds are dangerous and appropriate only for sophisticated investors.
• Keep a close eye on oil. ETFs of interest are the United States Oil Fund LP USO, -1.71% the VelocityShares 3x Long Crude Oil ETNs UWT, -5.12% the VelicityShares 3x Inverse Crude Oil ETNs DWT, +5.06% and the VanEck Vectors Oil Services ETF OIH, -1.68%
• Selectively short-sell if you are a sophisticated investor and want to take advantage of falling prices of specific securities.
• Be ready to buy more inverse ETFs if you are not inclined to short-sell.
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.