By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Misleading Headline
Please click here for a chart of Home Depot (HD).
Note the following:
- The Morning Capsule is about the big picture, not an individual stock. The chart of HD stock is being used to illustrate the point.
- Home Depot is an important stock because it is the largest home improvement retailer and its earnings give a glimpse into consumer sentiment. HD is also a component of the Dow Jones Industrial Average (DJIA).
- The chart shows that HD pulled back 20% from its high in March to its low in May.
- The chart shows that the rally from the low has made a double top. A double top is a negative pattern.
- The chart shows that the double top was made at a level significantly below the high. This is a negative.
- The chart shows the price drop on earnings.
- HD reported good earnings but the stock is falling on weaker comp sales outlook. The weaker comp sales outlook shows that the consumer is weakening. Here are the details:
- HD sees FY24 comp sales down 3% – 4% vs. down 1% prior.
- HD reports adjusted EPS of $4.67 vs. $4.49 consensus.
- HD reports revenues of $43.18B vs. $43.06B consensus.
- RSI on the chart shows that HD stock is now oversold.
- On the surface, Producer Price Index (PPI) came weaker than expected. Here are the details:
- Headline PPI came at 0.1% vs. 0.1% consensus.
- Core PPI came at 0.0% vs. 0.2% consensus.
- As of this writing, the stock market is running up focusing on PPI headline. However, in The Arora Report analysis, digging below the surface, the data is not as good as it seems. PPI ex-food, energy, and trade came at 0.3% vs. 0.2% consensus. This indicates the companies’ profit margins are compressing and in actuality, inflation is higher than reflected in the headline.
- In The Arora Report analysis, compression in margins has a negative read through for earnings. This data, along with several other pieces of data, is indicating that Wall Street’s estimates for future earnings may be too high.
- Prudent investors know that in the long run, earnings are the single best determinant of the stock market.
- Consumer Price Index (CPI) will be released tomorrow at 8:30am ET. CPI is more important than PPI.
- 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 Amazon (AMZN), Nvidia (NVDA), 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 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.
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
Gold December futures have crossed above $2500.
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 world is developing an oil surplus. Right now, the focus is on a potential attack by Iran.
The momo crowd is *** 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.
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 down, and bonds are ticking up.
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 $2510, silver futures are at $27.83, and oil futures are at $79.92.
S&P 500 futures are trading at 5397 as of this writing. S&P 500 futures resistance levels are 5500, 5622, and 5748: support levels are 5256, 5210, and 5020.
DJIA futures are up 126 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.
