Get ready for Dow 30,000, but beware of ‘buy the rumor, sell the news’

0
34
views
Getty Images

Higher earnings, tax reform and deregulation could propel this bull.

With the Dow Jones Industrial Average topping 24,000 in a big rally this year, Dow 30,000 is now on the horizon. That was not always the case.

In February 2017, when the Dow DJIA, -0.17%  was much lower, I laid out a fundamental case for the benchmark reaching 30,000. I was scorned, as many expected the market not only to fall, but to crash. Let’s explore that issue with a chart.

Chart dating to 1950

The chart shows GDP growth going back to 1950. President Trump has been talking about 4% growth in gross domestic product, which, as you can see, is a tall order. It’s been attainable in the past, but not so much recently. Still, even if Trump doesn’t meet his own goal, the economy — and corporate earnings — would benefit.

Read: Where to stash your money when this bull market makes you sweat

In plain English, if the economy starts growing at faster rate, the stock market has a shot at Dow 30,000.

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

The fundamental case

The fundamental case I laid out in February is very much intact. The case was based on higher earnings, tax reform and deregulation. So far that call has been spot on. You can read more details here.

Caveats

There is an old adage, “buy the rumor, sell the news.” Often there is a lot of wisdom in such adages. So far investors have been buying the rumor of the tax reform. Any time there is a negative development on any front, investors ignore it and pin their hopes on the upcoming tax reform.

Markets look ahead. When tax reform becomes a near certainty or actually becomes law, investors will no longer have tax reform to look forward to.

Selling on the news may be delayed, but there is a significant probability of it occurring.

One also has to be careful that bombshell news can emanate from anywhere at any time. Witness Friday’s surprise news that Michael Flynn pleaded guilty to lying to the FBI and has promised full cooperation with the special counsel’s Russia investigation. That report throttled stocks.

The best tool to gain an edge

Money-flow data can be your best friend.

Please click here to see a chart of money flows in popular ETFs such as S&P 500 ETF SPY, -0.21% Nasdaq 100 ETF QQQ, -0.43% and small-cap ETF IWM, -0.41%

Please click here for a chart of money flows in popular tech stocks such as Apple AAPL, -0.47% Netflix NFLX, -0.41% Alibaba BABA, -1.39% Microsoft MSFT, +0.11% Nvidia NVDA, -1.51% AMD AMD, -1.47% and Tesla TSLA, -0.75%

The “smart money” (professional investors) is already anticipating a potential sell-off while participating on the upside. We know this from smart money flows shown in the charts linked above. However, money flows shown on the charts indicate the momo (momentum) crowd is oblivious to a potential sell-off.

Holy Grail

You already know that opinions are a dime a dozen. How does an investor decide whom to follow? The answer is to look at track records.

The Holy Grail today is still the same that I described in February. For the sake of complete transparency, the following is reproduced from the February column:

“Under that scenario, the stock market would be a strong trending market. And in a strong trending market, the Holy Grail is to buy stocks with good fundamentals as prices dip. Here are 10 stocks investors should consider buying on dips: Applied Materials AMAT, -1.63% Amazon AMZN, -1.22% Bank of America BAC, -0.25% E*Trade ETFC, +1.56% Facebook FB, -1.17% Alphabet GOOG, -1.10% GOOGL, -1.07% J.P. Morgan JPM, +0.26% Micron Technology MU, -0.94% Royal Dutch Shell RDS.B, -0.26% and T-Mobile T, +0.33%

Please take a moment and compare the prices of those 10 stocks in February with today. Furthermore, you took less risk with those stocks than you would have with high-flying stocks because of diversification and good fundamentals.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.

Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.