In the past, China has shown extraordinary restraint in response to U.S. tariffs and President Trump’s critical tweets.

But now China is warning of retaliation if new tariffs set for Sept. 1 go ahead. This is a critical time for investors. We at The Arora Report prepare a variety of scenarios in advance. This way we not only get ahead of the curve but are also able to act with conviction as events unfold. All investors ought to consider doing the same. Let us discuss your game plan if China retaliates, starting with the help of two charts.

Two charts

Please click here for an annotated chart S&P 500 ETF

SPY, +0.26%.

Even though the Dow Jones Industrial Average

DJIA, +0.39%

is the most popular index, for analysis purposes, investors ought to focus on S&P 500 because the most money is tied to the S&P 500 Index

SPX, +0.25%

 of the largest U.S. companies. Investors with a heavy concentration in technology may consider Nasdaq 100 ETF

QQQ, -0.11%.

Please click here for a chart showing support zones. For the sake of transparency, this chart was previously published.

Note the following:

• The second chart shows that the U. S. stock market is in very good shape relative to the support zones in spite of high volatility. Those support zones are your guide if the stock market falls. To learn more about support zones, please see “Why you need to understand support zones in the stock market.”

• The first chart shows the Arora buy signal given on Christmas Eve, which has turned out to be the low of this cycle. Investors ought to make a special note that the level at which this signal was given now is the lower band of a major support zone. As long as this support is not decisively violated, investors ought to consider holding on to good long term positions with proper hedges and cash levels.

• The first chart shows four Arora signals given before the market drop to take profits on select positions and Chinese positions, protect long-term portfolios and do a short-term trade. Investors who do not have appropriate cash levels and hedges in place for these market conditions ought to consider taking protective steps on strong up days. Investors ought to resist the temptation of selling or establishing new hedges when the market is down 800 Dow points.

• The volume on the first chart shows churning with high volume. This indicates indecision. Right now volume shows that bulls and bears are in balance, but both have higher conviction than before.

• The RSI (relative strength index) pattern again shows indecision.

• Which way the market breaks from this indecision will depend on the news. Run away from anyone who claims to know the answer with certainty.

• There are two pieces of good news. Walmart

WMT, +6.10%

is a reflection of a big part of the U.S. economy. Walmart reported earnings that were better than the consensus and the whisper numbers in spite of the tariffs.

­• Alibaba

BABA, +2.89%

 is a reflection of China’s online economy. Alibaba also reported earnings that were better than the consensus and the whisper numbers. Previously JD.com

JD, +1.79%,

another major Chinese e-commerce provider, reported good earnings.

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.

Potential China retaliations

There are many ways China could retaliate; here are the five major issues that investors ought to be concerned about:

• China could further weaken its currency, the yuan. If China took this step, outflows from China would increase and the dollar would strengthen. This would be negative for the U.S. stock market in the short term but positive in the long term. More importantly, it would be negative for precious metals. Popular ETFs such as gold ETF

GLD, +0.66%

 and silver ETF

SLV, +0.37%

could fall.

• Because China holds a large quantity of U.S. Treasury bonds, the country could choose to sell them. In the past, this would have had a very negative effect on U.S. investors. However, now with U.S. interest rates having fallen so much, a slight increase in U.S. rates because of China selling Treasurys could actually be good news for the stock market. There would be trading opportunities using bond ETFs

TLT, +1.11%

and

TBT, -2.14%.

• Selling of long-term bonds by China could increase yields and get rid of the inverted yield curve.

• China could increase red tape for U.S. companies. Highly visible U.S. companies such as Apple

AAPL, -0.50%,

Starbucks

SBUX, +0.64%

 and Boeing

BA, +2.37%

would be at risk. Popular semiconductor stocks such as Intel

INTC, -0.37%

 and AMD

AMD, -1.88%

 could be adversely affected.

• China could discourage tourism to the United States. Even though the U.S. runs a big deficit on the trade of goods with China, the U.S. runs a surplus on services.

• China could cause geopolitical problems by supporting Iran, North Korea and Pakistan.

Game plan

China’s retaliation will be negative for U.S. stocks in the short term but positive in the long term. As actionable items, investors may consider the following:

• Hold significantly more than normal amounts of cash.

• Hedge, at least partially, long-term positions.

• Focus on short-term trading opportunities.

• Be ready to deploy cash opportunistically for the long term if the market falls.

• Restrain precious metals purchases.

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

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2019-08-15