Opinion: This is by far the biggest threat that Trump poses to the stock market – MarketWatch

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There is a sword of Damocles hanging over President Trump’s head.

Like him or not, Trump is a man of action. It is natural for him to do his best to remove the sword. The sword, in this case, being the peril of the Russia investigation undertaken by special counsel Robert S. Mueller III, a former FBI director.

If Trump does act to have Mueller fired, stocks might crash and gold might soar. To fully understand the potential of that scenario, let us start with a chart.

Chart

The stock market is in a vulnerable position. Not only are valuations stretched, but there is also a new menacing pattern in the market that deserves investors’ attention.

Please click here for an annotated chart. The chart is of the Nasdaq 100 ETF QQQ, -0.47% This ETF contains the leaders of the stock rally, including Facebook FB, -1.81% Apple AAPL, -0.75% Nvidia NVDA, -1.88%  and the like.

The chart shows a distribution pattern that likely will continue in the coming weeks. In plain English, a distribution pattern means there is more selling than buying. To learn more about that, please see: “A menacing pattern has revealed itself in the stock market.”

Mueller probe

Mueller is heading the investigation into possible Trump ties to Russian meddling in the presidential election. He’s also looking into Trump’s business dealings. Please note that I see my job as helping investors, and that I am politically agnostic. This article is about helping you be prepared.

Prudent investors plan for potential scenarios in advance. If you’ve ever wondered how successful investors are able to act with conviction before everyone else, this is how it is done.

Trump’s red line

Trump’s red line is an investigation into his finances. But Mueller is, in fact, probing Trump’s businesses going back a decade. When that news was announced a few days ago, the U.S. dollar immediately fell and gold jumped. Stocks fell on the news, but they recovered as the momo (momentum) crowd took control. However, the dollar did not recover, and gold did not give back its gains.

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.

Constitutional crisis

The dollar dropped because forward-thinking investors imagined a potential constitutional crisis in the United States.

President Trump cannot directly fire Mueller. But his allies in the Justice Department could. Especially if the president fired Attorney General Jeff Sessions, who has recused himself from the probe, and hired someone who would do his bidding.

Republican defections

Republican Sen. Lindsey Graham has said there would be “holy hell to pay” if Sessions is fired. If Trump were to find a way to fire Mueller, there would likely be Republican defections. With some Republicans joining Democrats to potentially impeach Trump for obstruction of justice, a constitutional crisis could erupt.

Big picture

Often those who are too close to the trees have difficulty seeing the forest. Most investors in the United States at this time are oblivious to the impact on the U.S. dollar if the political situation in Washington worsens. However, it is a different story among foreign investors. From the data we gather at The Arora Report from 23 countries, the concern among foreign investors is significant about the U.S. dollar. It appears that foreign investors have a finger on the trigger to sell the dollar. If the dollar is sold aggressively, gold and silver would rocket.

Gold might soar

Gold and silver are very sensitive to geopolitical events. Gold is priced in dollars. When the dollar falls, gold tends to rise. ETFs of interest are gold ETF GLD, -0.13% silver ETF SLV, +0.38% gold miner ETF GDX, +0.17% junior gold miner ETF GDXJ, -0.18% and leveraged miner ETF NUGT, +0.36%

Stocks might crash

A rapidly falling dollar would likely make business confidence plunge. Historically, worsening business confidence leads stocks lower.

Since many investors use ETFs, broad-based ETFs of interest are SPY, +0.05% and IWM, -0.13% Especially vulnerable are stocks such as Tesla TSLA, -3.26% Applied Optoelectronics AAOI, -0.32% Hertz HTZ, -16.88% Avis Budget Group CAR, -3.65% Discovery DISCA, -9.63% U.S. Steel X, +1.52% Square SQ, -0.52% and PayPal PYPL, -0.72%

Trump is shrewd

Trump will try to remove the sword of Damocles without causing a constitutional crisis. For this reason, the probability of this ugly scenario occurring is somewhat low — for now. My longtime readers know that I rely on algorithms. However, there is not an algorithm that can predict this probability. The best place to look is the dollar — and concern about the dollar. Based on this, the probability of this scenario is about 10%.

What to do now

Reproduced below is the “what to do now” section from the Morning Capsule that is provided daily to subscribers of The Arora Report.

“It is important for investors to look ahead and not in the rearview mirror.

“Consider continuing to hold existing positions. Based on individual risk preference, consider holding cash or Treasury bills 18%-28% and short to medium-term hedges of 15%-25% and very short-term hedges of 15%.

“It is worth remembering that you cannot take advantage of new upcoming opportunities if you are not holding enough cash. When adjusting hedge levels, consider adjusting partial-stop quantities for stock positions (non-ETF); consider using wider stops on remaining quantities and also allowing more room for high-beta stocks. High-beta stocks are the ones that move more than the market.”

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.

Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

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