By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Chinese Market Breaks Negative Pattern
Please click here for a chart of Mainland China ETF (ASHR).
Note the following:
- In prior Morning Capsules, we shared with you details of China’s stimulus program. Prior to last Tuesday, Chinese stocks had been beaten down and had been trading at low valuations.
- The chart shows that the Chinese stock market has broken the negative pattern of lower highs.
- The chart shows that the pattern existed from the 2021 peak until last week.
- When the rally first started, the concern was that this rally would also fail like prior rallies. Initially, it was simply prudent to consider the rally in Chinese stocks last week to be suspect. The chart shows that even the COVID opening rally failed, and the subsequent AI rally also failed.
- The chart shows that the rally is on high volume. This indicates conviction and provides confirmation for the rally.
- RSI on the chart shows that the Chinese stock market is very overbought. Overbought markets tend to pullback in the short term.
- In Shanghai, the CSI 300 jumped 8.5%. This is the biggest single day gain since 2008.
- The five day gain in Shanghai is the strongest since 1996.
- The chart shows that this rally has decisively broken the downtrend like a rocketship.
- From a technical perspective, such strong rallies tend to take stocks higher after a brief pullback.
- The rally is partly driven by fear of missing out (FOMO) among foreign investors who are rushing into China.
- Money is flowing out of safer Chinese 30 year Treasury bonds and into Chinese stocks. Chinese 30 Treasury bond futures fell to a two month low after losing 3.6% last week. This is the worst quick loss ever.
- For the day, the economic data from China is poor. China’s PMIs are weak. Here are the details:
- Manufacturing PMI came at 49.8 vs. 49.4 consensus.
- Non-manufacturing PMI came at 50.0 vs. 50.4 consensus.
- A number less than 50 is considered economic contraction.
- Expectations are that China’s PMIs will spike up in the coming months due to government stimulus.
- There will be new buy zones on Mainland China ETF ASHR and Hong Kong ETF FXI in ZYX Emerging. There is also a new buy zone for emerging markets consumer ETF ECON in ZYX Emerging. Emerging market consumers are getting rich and provide one of the best opportunities for long term investors. Instead of chasing the price on Chinese stocks and ETFs, prudent investors should consider being highly selective. For additional information, please see ZYX Emerging.
- In The Arora Report analysis, investors are ignoring two risks in China:
- The traditional geopolitical risk, especially related to Taiwan.
- The risk of Trump being elected. Trump is proposing 100% – 200% tariffs on Chinese goods. Such tariffs will negate much of the benefit from the Chinese government stimulus.
- Unlike last week, the optimism from China is not carrying to the U.S. for the following reasons:
- Stellantis (STLA), the owner of Chrysler, Jeep, and Fiat, is giving poor guidance.
- Volkswagen (VWAGY) is also providing poor guidance.
- Stocks of General Motors (GM) and Ford (F) are coming under pressure.
- Negative sentiment from Europe is carrying to the U.S.
- East coast dock workers may go on strike, disrupting commerce.
- Also not helping this morning is that quarter end window dressing is almost over. In window dressing, some money managers buy the best performing stocks of the quarter so that they can show their clients in the quarter end reports that they were holding the best performing stocks. This was partially the reason for the recent strength in Nvidia (NVDA) and other AI stocks.
- As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the protection band. The protection band is one of the large number of unique edges that are available to members of The Arora Report.
Magnificent Seven Money Flows
In the early trade, money flows are positive in Apple (AAPL).
In the early trade, money flows are neutral in Microsoft (MSFT), Alphabet (GOOG), and Meta (META).
In the early trade, money flows are negative in Tesla (TSLA), Amazon (AMZN), and NVDA.
In the early trade, money flows are negative in S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ).
Momo Crowd And Smart Money In Stocks
The momo crowd is *** (To see the locked content, please take a 30 day free trial) stocks in the early trade. Smart money is *** stocks in the early trade.
Note for new members: Smart money often sells into the strength generated by momo crowd buying and buys into the weakness generated by momo crowd selling. Over a long period of time, investors come out ahead by adopting smart money’s ways. The exception is in a raging bull market – for very short term trades, consider following the momo crowd and not smart money.
Gold
The momo crowd is *** in gold in the early trade. Smart money is *** in the early trade.
For longer-term, please see gold and silver ratings.
Oil
The momo crowd is *** in oil in the early trade. Smart money is *** in the early trade.
For longer-term, please see oil ratings.
Bitcoin
Bitcoin (BTC.USD) is seeing some selling along with junk stocks.
Markets
Our very, very short-term early stock market indicator is ***. This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.
Interest rates are ticking up, and bonds are ticking down.
The dollar is weaker.
Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.
Gold futures are at $2660, silver futures are at $31.63, and oil futures are at $68.39.
S&P 500 futures are trading at 5778 as of this writing. S&P 500 futures resistance levels are 5926 and 6017: support levels are 5748, 5622, and 5500.
DJIA futures are down 82 points.
Protection Band And What To Do Now
It is important for investors to look ahead and not in the rearview mirror.
Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding *** in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of ***, and short term hedges of ***. This is a good way to protect yourself and participate in the upside at the same time.
You can determine your protection bands by adding cash to hedges. The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive. If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.
A protection band of 0% would be very bullish and would indicate full investment with 0% in cash. A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.
It is worth reminding 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.
Traditional 60/40 Portfolio
Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.
Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less. Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.
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Nigam Arora
Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.
Dr. Natasha Arora
Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.
