By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Consumer Spending Binge
Please click here for a chart of S&P 500 ETF (SPY) which represents the benchmark stock market index S&P 500 (SPX).
Note the following:
- The chart shows a big rally in the stock market yesterday. The rally was triggered by callous calculation by Wall Street. Please read yesterday’s Morning Capsule to learn more about the callous calculation.
- The chart shows that RSI has quickly become overbought. Even though overbought markets are vulnerable to a pull back, in the complete context of volume and price action, this quick move up in RSI is a positive for the market.
- The chart shows that the market is consolidating above the top band of the top band of the support zone. This is a sign of technical strength. The primary reason behind the strength is the two market mechanics.
- The market mechanic of positioning is to the upside.
- The market mechanic of year end chase is to the upside.
- Market mechanics are powerful. About two-thirds of the market rise this year is due to market mechanics. Understanding market mechanics can give you a big edge. Due to their high value, most of the knowledge about market mechanics is kept close to the chest of Wall Street professionals. The best way to learn about market mechanics is to listen to the podcast in Arora Ambassador Club.
- The new data on consumer spending is unexpectedly strong. The US economy is 70% consumer based, therefore prudent investors pay attention to retail sales. Here are details of the new data:
- Headline retail sales came in at 0.7% vs 0.3% consensus.
- Retail sales ex-auto came in at 0.6% vs 0.2% consensus.
- In The Arora Report analysis, the reason retail sales continue to stay strong is due to the free money distributed by the Federal government through a number of programs during the pandemic. Now even though the headlines of free money have faded, the money that the Federal government borrowed and spent is still in the system. Further, there is unprecedented spending by the Federal government under the Inflation Reduction Act and Infrastructure Act. The money from these two acts will continue to flow for years. Wealthy consumers still have significant savings, low end, and middle class consumers are borrowing more and charging more to their credit cards. Since consumers got into the habit of spending more, they are not likely to change that behavior until the money in the system starts drying up.
- Yields are rising after the release of retail sales data.
- Yesterday in the Morning Capsule we shared with you that the Biden Administration was tightening restrictions against China. It should have impacted many stocks such as Nvidia (NVDA) but it did not as investors aggressively bought on Wall Street’s callous calculation. In the Afternoon Capsule, we wrote:
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Investors are back in the mode of bad news is good news. Periodically the market gets in the mode of investors buying any stock that has news, good or bad. Today is one of those days. Investors are aggressively buying any company with news.
- Today investors are noticing the new restrictions and they are selling stocks such as NVDA in early trade. It is not uncommon for markets to have delayed reactions especially when investors get in the euphoria mode like they did yesterday.
- President Biden, in a historic first, will be visiting Israel tomorrow. This is the first visit ever by a US president to Israel in wartime. Here are the key points of Biden’s visit:
- The purpose of Biden’s visit is to show complete solidarity with Israel.
- Biden’s visit is designed to deter Iran and Hezbollah from opening a northern front in Israel.
- There are reports that Biden has reached a deal with Israel Prime Minister Netanyahu to provide help to Palestinians in the Gaza Strip.
- To help with humanitarian aid and to contain the conflict Biden will also be visiting Jordan. In Jordan, he will meet with the Egyptian President Abdel Fateah El-Sisi and the Palestinian President Mahmoud Abbas.
- In The Arora Report analysis, prudent investors need to keep a close eye on the new warning from Iran of a potential preemptive action against Israel.
- Hezbollah and Israel have been engaged in firing at each other raising tensions.
- The warning from Iran has stopped the stock market rally in its tracks.
- To reduce risk, many institutions seem to be selling on this warning.
- In The Arora Report analysis, among the earnings released this morning so far, Bank of America (BAC) earnings are the most important. The reason is Bank of America has a large consumer deposit base and thus has good visibility into consumer behavior. Bank of America is saying that consumer spending is slowing. In spite of a drag from ill-timed bond purchases and losses on bonds, Bank of America earnings are better than expected.
- Among other earnings, earnings from Goldman Sach (GS) and Lockheed Martin (LMT) are worse than expected; earnings from Johnson & Johnson (JNJ) are better than expected.
- 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.
Magnificent Seven Money Flows
In the early trade, money flows are negative in Amazon (AMZN), Nvidia, Microsoft (MSFT), Alphabet (GOOG), Meta (META), Tesla (TSLA), and Apple (AAPL).
In the early trade, money flows are mixed in S&P 500 ETF (SPY) and mixed in 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.
Gold
The momo crowd is *** 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 range bound, there is enthusiasm about a bitcoin ETF, and has brought in buying.
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 stronger.
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 $1937, silver futures are at $22.81, and oil futures are at $86.71.
S&P 500 futures are trading at 4379 as of this writing. S&P 500 futures resistance levels are 4400, 4460, and 4600: support levels are 4318, 4200, and 4000.
DJIA futures are down 122 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.
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.
