The surprise announcement by President Trump of imposing new tariffs on goods imported from Mexico does not change a previously prescribed action item for investors.
Let us examine this issue with the help of a chart.
Please click here for an annotated chart of a Nasdaq 100 ETF QQQ, -1.60% Similar conclusions can be drawn from the charts of the Dow Jones Industrial Average DJIA, -1.41% and an S&P 500 ETF SPY, -1.35% For the sake of transparency, the chart is the same one previously published before the current downturn in the stock market. Please note the following:
• I have previously written that technical analysis no longer works as well as it used to. For the reasons, please click here. However, there is still significant value in technical analysis when done right and when combined with fundamental, quantitative and macro analysis.
• At the time of the publication of the chart, the surprise announcement of tariffs on Mexico was not known. The chart was also published in advance of the recent downturn. However, the chart foretold the risks.
• The chart showed a failure of the rally.
• The chart showed the Arora call to buy inverse ETF PSQ, +1.67% which goes up when the market goes down, or short the Nasdaq 100 ETF.
• The chart showed the Arora calls to raise cash and hedges.
• Relative strength index (RSI) on the chart showed only a weak bounce from the oversold condition. This was foretelling more downside.
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Stocks to watch for clues
For clues, watch stocks of car companies such as General Motors GM, -4.25% Ford F, -2.26% and Fiat Chrysler FCAU, -5.82%
Tariffs on Mexico should not have any major impact on popular tech stocks such as Apple AAPL, -1.81% Alphabet GOOG, -1.28% GOOGL, -1.33% and Amazon AMZN, -2.27% It should also not have any major impact on semiconductor stocks such as Intel INTC, -1.54% AMD AMD, -2.21% and Micron Technology MU, -2.13% Movements in tech stocks will continue to correlate to China.
Action item
The action item for prudent investors has not changed from what was previously prescribed. I wrote at the time of the original publication of the chart: “All investors ought to consider taking appropriate measures to protect their portfolios.”
There is significant value in using portfolio protection — remember what happened in 2008. Especially at this time, it is important for investors to not get fooled by static models that worked in the past. Market conditions are now different and previously successful static models may not work. The chart linked above shows when we increased portfolio protection in May and a sell signal on technology stocks.
While investors are focused on Mexico now, it is important to pay attention to the latest data from China. A key manufacturing report — the Purchasing Managers Index (PMI) — came in at 49.4 in May vs. 50.1 in April. A number less than 50 is considered recessionary. That indicates China’s economy is weakening. Will it prompt China to become more accommodating in negotiations with Trump? A trade deal can still happen, leading to a big potential “up” move in the stocks.
For this reason, selling good long-term positions at this time is not a good idea. Moreover, the economic data we carefully monitor at The Arora Report shows that the U. S. economy is in good shape. Thinking in terms of protection makes more sense. Investors also ought to consider surrounding good long-term positions with opportunistic short-term trades. Investors may also consider evergreen strategies. Please see “Here’s an evergreen strategy to make money in a volatile stock market.”
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.