By Nigam Arora
The market's action doesn't seem to prove the president's assertion
President Trump said Wednesday that "so-called 'rich guys'" may be "speaking negatively" about the stock market to profit from its decline.
Trump's tweet () came after billionaire investor Stanley Druckenmiller said the risk-reward relationship in stocks has never been worse. Trump didn't identify Druckenmiller in his tweet, and there's no evidence that the professional investor recently short-sold equities.
Trump is only half right. Let's explore this issue with the help of a chart.
Please click here () for an annotated chart of the Dow Jones Industrial Average ETF (DIA).
Note the following:
-- The chart shows that the stock market opened below the resistance zone in May, and that after repeatedly bumping against it, it failed to make a deeper penetration.
-- The chart shows that 65% of the rally resulted from short-squeezes. I had said this influence might exhaust itself in mid-April (). It does not mean that a new short-squeeze cannot start at any time.
-- The foregoing is a good setup for short-selling.
-- But such a setup is not a secret exclusive to the wealthy.
-- Some investors put a lot of faith in 13F filings with the Securities and Exchange Commission by the so-called rich guys -- investment pros with a lot of money. The filings show their holdings at the end of each quarter.
-- That faith is misplaced. First, the filings are delayed by six weeks. (First-quarter positions should be unveiled any day now.) Second, there are loopholes that enable the rich guys to obfuscate their true holdings.
Talk your book
Trump is right in that the rich guys often talk their book. In my over 30 years in the markets, my conclusion is that it is not uncommon for large investors to say one thing and do another to benefit their positions. Trump is right in that respect.
However, I am not seeing evidence of wholesale short-selling at this time. Short-selling produces spikes in prices with heavy volume that can last for days. The major indexes have not experienced that.
The reason for a lack of short-selling is that the Federal Reserve is adding unprecedented stimulus to the financial system, which is producing demand for equities. It is common sense to limit position sizes when it comes to short-selling these days.
What does it all mean?
A clue for investors who do not have access to sophisticated algorithms and a lot of experience is to watch these five big tech stocks (Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Facebook Inc. (FB), Alphabet Inc. (GOOGL) (GOOGL) and Microsoft Corp. (MSFT). Big-money investors are hiding out in those venerable companies until they can gauge the outlook for the broader market. So the direction of those stocks' prices is key.):
Answers to your questions
Answers to some of your questions are in my previous writings. Please click here () for details.
Disclosure: Arora Report () portfolios hold AMZN, FB, GOOG, MSFT and AAPL. Nigam Arora is the founder of The Arora Report, which publishes four newsletters.
-Nigam Arora; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
May 14, 2020 16:07 ET (20:07 GMT)
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