The rally in the U.S. stock market, which in large part had been due to a short-squeeze, recently exhausted itself.

Without positive news, the stock market would have sunk.

But stock market bears ran out of luck when a report surfaced Thursday after the close of trading that an antiviral drug, Gilead’s remdesivir, showed promise in treating coronavirus patients.

That’s why investors may consider following the simple principle that I have learned in my over 30 years in the markets: Neither be a bull nor a bear. Over time, the practical way to use this principle has become encapsulated in Arora’s Fifth Law of Investing and Trading: “You need to be neutral and set aside your opinions and biases to see the true message from the markets.”

There was an interesting development on March 23, which turned out to be the stock market low. I wrote at that time: “Many antivirals are being tested, and significantly good news from any one of the major drugs trials will likely cause a 5,000-point rally in the Dow. Other indexes, of course, would rise too.”

This shows the power and benefits for the stock market investor of doing scenario analysis in advance.

The stock market bulls’ declaration of victory on anecdotal data about Gilead’s GILD, +0.01% remdesivir treatment is premature — more later on this. However, the stock market’s reaction shows that a 5,000 Dow point rally is highly probable if a true cure is found. Recall that the Dow topped out at 29,569 in February — only two months ago.

No stock market investor should underestimate the risks from the coronavirus that are ahead. There is a prudent, logical way to navigate the stock market in this volatile coronavirus situation that has proven itself since the Jan. 22 call from The Arora Report of a potential stock market drop due to the deadly virus.

Let’s discuss this.

Three charts

Please click here for an annotated chart of the SPDR Dow Jones Industrial Average ETF DIA, -0.85% , which tracks the Dow Jones Industrial Average DJIA, -0.87% .

Please click here for an annotated chart of Gilead.

Please click here for an annotated chart of S&P 500 futures ES00, +0.03% , which is the futures for the S&P 500 Index SPX, -1.11% .

Note the following:

• The first chart is monthly, giving a long-term perspective. This chart should be the starting point of all analysis.

• The second and third charts are 15-minute charts to help investors focus on what will happen in the stock market if a true cure is found.

• The first chart shows that in the absence of more good news, the stock market is primed for a significant pullback.

• The second chart shows the time in after-hours trading when the Gilead news appeared. Initially, the reaction was muted because analysts and the smart money took a critical view and knew there were limitations — a celebration was premature.

• A little while later, when a TV network reported the news, Gilead’s stock took off, as shown on the chart. It is no secret that this stock market is controlled by the momo (momentum) crowd, and the momo crowd is not known for deep analysis. The Arora Report’s signal to buy Gilead stock to take advantage of the momo crowd was made for super-aggressive investors only.

• The third chart is the most instructive. It shows a rally in the futures equivalent of 850 Dow points on Gilead’s coronavirus news.

• The second and third charts show the VUD indicator. The VUD indicator is the most sensitive measure of net supply demand in real time.

• The VUD indicator shows strong net demand not only for Gilead stock, but for money being poured into the stock market.

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.

Ray of hope

Gilead’s remdesivir provides a ray of hope. The report looks at coronavirus patients in a Chicago hospital that received remdesivir. They had rapid recoveries. However, that trial is only a small part of a multicenter trial. The data released is uncontrolled — there was no control group — and anecdotal. We need to wait for the data from the placebo-controlled, double-blind study.

The second and third charts linked above show that currently too much euphoria is prevailing in the stock market. This is a danger signal for prudent investors.

In our analysis, the most likely scenario is that remdesivir will be helpful but not a first-line treatment for the coronavirus.

Answers to your questions

Answers to some of your questions are in my previous writings. You can access them here.

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.