By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Very Large Quadruple Witching
Please click here for a chart of Microsoft stock (MSFT).
Note the following:
- The Morning Capsule is about the big picture, not an individual stock. The chart of MSFT stock is being used to illustrate the point.
- Microsoft is the second most important stock to the stock market after Nvidia (NVDA).
- The chart shows MSFT stock has broken out.
- MSFT stock is breaking out at a time when NVDA stock is pulling back.
- The chart shows the breakout was on heavier volume. This indicates conviction in traditional technical analysis.
- In The Arora Report analysis, the breakout is suspect for three reasons:
- There does not appear to be any significant fundamental development that would cause the breakout.
- Money is moving out of NVDA and into MSFT, but this may be temporary.
- There appears to be a gamma squeeze related to quadruple witching. Gamma squeeze is an important market mechanic. Understanding gamma squeeze can give investors an edge. The easiest way to understand gamma squeeze is to listen to the podcast in Arora Ambassador Club titled “MARKET MECHANICS: IMPACT OF DEALERS’ GAMMA POSITION CHANGE ON THE STOCK MARKET.”
- Today is quadruple witching. In quadruple witching, stock index futures, futures options, stock options, and single stock futures expire. Quadruple witching often leads to volatility.
- This is a very large quadruple witching with about $5T of notional value of contracts expiring.
- A vast majority of the contracts expiring are call options. Call options are bullish bets.
- Historically, when such a large amount of call options expire, the market tends to pull back the week after. However, the markets always have crosscurrents. Next week is the FOMC meeting. The momo crowd tends to buy aggressively on hopium prior to the Fed announcing the results from the FOMC meeting. Here is the key question “Will the downward drag from quadruple witching be overcome by momo crowd hopium buying?”
- In a notable development, the stock of Adobe (ADBE), an AI darling, is falling on weak guidance. The guidance is weak because of increasing AI competition. This development shows the wisdom of what we started sharing with you in 2022 – a fortune is to be made in AI, but it will not be a straight line. We also shared with you that at times it will be treacherous as many companies will be disrupted by AI. Adobe is an example where AI from OpenAI is hurting AI products from Adobe. It is extremely important that investors become knowledgeable about AI. The easiest and the best way to become knowledgeable is to listen to the podcasts in Arora Ambassador Club.
- University of Michigan consumer sentiment survey results will be announced at 10am ET. This may be market moving.
- 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.
Japan
We have been sharing with you that the policies of Bank of Japan (BoJ) impact stock markets across the globe, including the U.S. stock market. The largest union group in Japan just negotiated higher wages than expected. The developing narrative is that Bank of Japan may use the union deal to abandon its negative interest rate policy. The Bank of Japan meeting takes place next week.
Magnificent Seven Money Flows
In the early trade, money flows are neutral in Meta (META), Apple (AAPL), Microsoft (MSFT), Tesla (TSLA), Amazon (AMZN), and Nvidia (NVDA).
In the early trade, money flows are negative in Alphabet (GOOG).
In the early trade, money flows are mixed 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 *** 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 *** oil in the early trade. Smart money is *** in the early trade.
For longer-term, please see oil ratings.
Bitcoin
Yesterday, bitcoin (BTC.USD) bitcoin touched a new high of $73,798 on retail buying. Yesterday, PPI data showed hotter inflation. Even though the hype machine tries to convince mom and pop that bitcoin is an inflation hedge, the reality is that it is not. Bitcoin whales know that bitcoin is not an inflation hedge, so they took advantage of the strength to liquidate about $500M of bitcoin, causing bitcoin to drop. Bitcoin is trading around $68,000 as of this writing.
For those who want a deeper understanding of what is happening in bitcoin, listen to the three part series. If you are interested in access, please fill out the form below.
Markets
Our very, very short-term early stock market indicator is ***. Remember today is a Friday, and short squeezes tend to occur on Fridays. 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 and bonds are range bound.
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 $2165, silver futures are at $25.40, and oil futures are at $81.25.
S&P 500 futures are trading at 5216 as of this writing. S&P 500 futures resistance levels are 5265, 5400, and 5500: support levels are 5210, 5020, and 4918.
DJIA futures are down 25 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 seven 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.
