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Three numbers show that a potential trade war between the U.S. and China, and possibly other countries, is less likely. Improving money flows are confirming that, at least temporarily.
Let’s explore with two charts.
Two charts
Please click here for the previously published, annotated chart of the stock market. For full transparency, this chart is unchanged.
Please click here for a similar chart for the subsequent period.
The VUD indicator shown on the chart is akin to an X-ray of the market. The chart is of S&P 500 futures ESM8, +0.58% Similar conclusions can be drawn from popular ETFs such as S&P 500 ETF SPY, +0.66% Nasdaq 100 ETF QQQ, +0.60% and small-cap ETF IWM, +0.40%
The reason for using the futures chart is that it provides better information. In periods of extreme volatility, the fastest players tend to focus on the futures. Please observe the following from the charts:
• Compare the VUD indicator on the two charts.
• The charts show X-rays of the market in the form of the VUD indicator. The VUD indicator is the most sensitive indicator of true net demand or net supply in the real time.
• When supply of stocks is higher than the demand for stocks, the VUD indicator is shown in orange. When demand exceeds supply, the VUD indicator is shown in green.
• The previous chart shows a strong negative VUD indicator.
• The chart for the subsequent period shows that the VUD indicator is positive.
• The positive VUD indicator predicted a short-term rally. This prediction is spot on.
Read: Why everybody should stop blaming Trump and his tariffs for the market retreat
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 three trade numbers
Here are the three trade numbers that show that a trade war is less likely.
• In 2017, the U.S. imported $506 billion worth of goods from China.
• Trump is talking about tariffs on only a small fraction in the range of $50 billion-$60 billion.
• China’s response is very weak. In a tit-for-tat, China would have proposed duties on U.S. goods worth around the same amount. Instead, China is proposing duties on $3 billion worth of goods.
The previous call
The Arora Report raised cash prior to the 1,100-point drop in the Dow Jones Industrial Average DJIA, +1.00%
The Arora Report previously stated: “When the VUD indicator is extremely negative over a period of time, it sets the market up for a bounce. If the market was not so high and trade war concerns were not there, the interpretation of the chart would have been that the market is in the process of retesting February lows and then likely to bounce [higher]. However, given the prospect of a trade war and the fact that the VUD indicator is very negative but not extremely negative, investors should take some defensive steps.”
In the big picture, that call is still valid.
Important tips
• Money flows are becoming less negative in Boeing BA, +0.94% and Caterpillar CAT, +0.85% stock. Those two stocks reflect the leading edge of sentiment on the trade war. Please see “10 popular stocks that would be hit hard if Trump started a trade war.”
• Facebook FB, -6.07% stock has been hit hard on privacy concerns. The concern has spread to other FAANG stocks of Apple AAPL, +1.10% Amazon AMZN, +0.56% and Google GOOG, -0.97% GOOGL, -1.32% Money flows in those stocks are improving.
• The Federal Reserve has taken a hawkish tilt. Investors may want to keep an eye on J.P. Morgan JPM, +1.68% and Bank of America BAC, +1.89% stock. Those two stocks reflect the leading edge of sentiment on interest rates.
• One of the most popular tech stocks has been Micron Technology MU, -2.22% After poor price action after the company posted earnings, money flows are improving.
• China appears to be intervening to support its stock market.
What to do now
We provide specific detailed guidance to The Arora Report subscribers in the form of cash levels, hedges, profit taking and positions to hold. In general, consider adequate cash and hedges while maintaining attractive long-term positions.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. 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.