Equity prices have been rising steadily, and now there might be an acceleration
The stock market has been going straight up. And a new signal has just been given, showing that it’s possible that you haven’t seen anything yet. Let’s start with a chart to understand this.
Please click here for the chart, which compares the S&P 500 ETF (SPY) with momentum ETF (MTUM). Notice the rate at which the S&P 500 has risen. Also notice that, until recently, the momentum ETF had lagged behind but has now caught up.
In mathematical terms, a parabola is a curve where any point is at an equal distance from a fixed point called the focus and a fixed straight line called the directrix. In the context of the stock market, a parabolic move simply means that the rate of the stock market gains will increase by a large amount.
A parabolic move can be highly profitable. There is potential to make more money in the stock market than has already been made.
The signal from the algorithms
For market timing and allocation, at The Arora Report we use the adaptive ZYX Global Multi Asset Allocation Model. Adaptive means that the underlying algorithms automatically change with market conditions. The model has macro, fundamental, quantitative and technical inputs in 10 categories.
The probability of a parabolic move, according to the algorithm, has been limping along around 0% for a very long time. The probability of a parabolic move has just jumped to 20%. It is due to a combination of different factors. The biggest factor is the way stocks are acting after they report earnings that are better than the whisper numbers and analysts’ consensus numbers.
In plain English, probability simply means the likelihood of something happening.
The probability of getting heads in a fair coin toss is 50%. A probability of 70% means there are 70 chances out of 100 for that event to occur.
One of the most important contributions to profitability in your trading will be Nigam’s Second Law of Investing: “Nobody knows with certainty what is going to happen next.” For this reason, the only way to be consistently profitable over a large number of trades, over a long period of time, is to think in terms of probabilities. If anyone tells you any different, run away from them as quickly as you can, as following them will lead to losses over a large number of trades over a long period of time.
The safest way to play it
One of the safest ways to play the markets if a parabolic move is starting is to use the momentum ETF MTUM. MTUM is already in the ZYX Global portfolio of The Arora Report.
Investors may also consider emerging markets of India, Indonesia, Vietnam, China and Russia. These emerging markets have the potential to provide even bigger returns.
What to do now
This is a call to be prepared to buy aggressively if the parabolic move starts or the probability of the parabolic move goes higher. The reason is that, historically, such moves happen very quickly. If you have prepared ahead of time, you can act with conviction.
To be absolutely clear, this is not a call to start buying now. It is true that the probability of a parabolic move is 20%, but there’s an 80% probability of such a move not occurring. We will be on high alert and carefully monitoring the situation.
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.