Bulls in the stock market are giddy.
What is there no to be happy: the stock market mostly goes up, and making money seems easy. While newly minted investors focus on accumulating small, speculative stocks, institutions hide in large-cap tech stocks.
For prudent investors, now is the time to understand two great hidden risks of the stock market, when the market is high. Let’s explore with the help of a graph.
Graphic
Click here to see a chart of the Dow Jones Industrial Average ETF DIA,
which tracks the Dow Jones Industrial Average DJIA,
Consider the following:
• To give investors a long-term perspective, the chart dates back to the start of the bull market in 2009.
• The chart compares the Dow Jones Industrial Average with the S&P 500 SPX,
Amazon (AMZN,
Apple AAPL,
GOOG Alphabet,
GOOGL,
and Facebook FB,
• As popular as Apple’s shares among investors, the chart is a revelation as Apple has underperformed Amazon, Alphabet and Facebook shares.
• Apple has just reported windfall profits despite the pandemic. The company also announced a four-for-one stock split. Apple’s shares are flying high.
• Amazon was expected to report large profits as it became a quintessential utility for consumers during the pandemic. Amazon beat most estimates.
• Despite the advertiser boycott, and a drop in advertising in general, Facebook’s earnings were an explosion, as was Apple’s.
• The alphabet gains were excellent, but not an explosion. However, by some measures, Alphabet is the cheapest of the four stocks.
• The graph shows that many stocks plunged into Arora’s buy zones during the March stock market crash. Buying zones are very powerful for stock market investors. You buy when the shares fall in the buy zones. It takes patience but it’s worth it. For example, Apple’s shares dipped into Arora’s buy zone, trading as low as $ 212.61 not too long ago, and is now around $ 410 as of this writing.
• Stock charts for Apple, Amazon, Alphabet and Facebook are as bullish as they can be. Companies’ profits are accelerating. If they can make great profits during a pandemic, imagine what they can do when the economy begins to grow and there is a vaccine. Its dominance in the market is increasing and so is the range of its offers.
Two hidden risks
Before sending me a hate mail for pointing out the risks, please understand that the Arora Report is optimistic about these actions. Amazon, Facebook, Alphabet and Apple are in The Arora Report’s model portfolio. And my job is to help investors. While many investors focus on the rewards of the stock market, it is more important to focus on the risks in this environment, where excessive government loans and excessive printing of money by the Federal Reserve are inflating the stock market bubble. . Here are the two hidden risks:
• Part of the strength of these four companies is that they have become quintessential public service companies. Consumers have very few real options to go elsewhere. Typically, public services in the United States have been regulated and there have been serious regulatory limits on the profits they can make. If you saw the recent hearing in Congress, you may have already unequivocally concluded that the regulation is coming. It is a question of “when”, not “if”.
• These four actions have become crowded stores. The best way to understand a crowded trade is to think of a fast-moving boat with everyone on one side. The boat can continue to sail safely for a long time, but it only takes a small wave to capsize.
Investors must properly restructure their equity portfolios to account for these risks.
Disclosure: Arora Report portfolios have positions at Apple, Amazon, Alphabet and Facebook. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. He can be contacted at [email protected].
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