By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Four Critical Days Ahead
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:
- Here is the important question for prudent investors: Should investors wait or deploy cash now?
- The chart shows the formation of an inverse head and shoulders pattern. This is a bullish pattern. The Arora Report previously gave you a heads-up that this bullish pattern was forming.
- The chart shows the algo selling line in red. The Arora Report gave you an early warning in advance of potential algo selling. That call has proven spot on. We wrote,
The chart shows a red line. The breach of the level shown by the red line is potentially the point where Wall Street’s algorithms have been programmed to sell stocks.
- The chart shows that after staying below the algo selling line for about a month and a half, the market is approaching the algo selling line from the bottom.
- If this algo selling line is crossed to the upside, expect Wall Street’s algorithms to buy and potentially produce a mirror image of the downside from before.
- Overall, the technical pattern is positive.
- Four critical days are ahead.
- Fed rate decision on November 2
- Jobs report on November 4
- Midterm election on November 8
- CPI data on November 10
- Three of these four critical days have the potential to cause a major move in the stock market in either direction. As we have been writing, 18 of the last 18 times, the market has gone up after the midterm elections irrespective of who wins. This time the stock market has moved up, in part, on Republicans gaining in polls in recent days. However, over the recent years, polls have been notoriously wrong. If Democrats win, this time the market may not go up.
- If you were to answer the key question above based on the macro, the fundamentals, geopolitics across the globe, and the four mega trends ending, the answer would be clear – wait.
- We previously wrote,
Expect many institutions to heavily buy stocks around S&P 500 level of 3400.
At the same time be aware that stops of many institutions and hedge funds are right under 3400. Hunt and destroy algorithms will attempt to take out these stops. If these stops are taken out, there may be panic selling. Our plan is to buy into the panic selling if panic selling occurs.
- We have been receiving a large number of requests from our members to help with in-depth knowledge on hunt and destroy algorithms. Good news, a podcast titled “Wall Street Secret: Hunt And Destroy Algorithms” has been recorded and is in post production.
- We also previously wrote,
From a strategic point of view, nothing has changed. The plan still is to start buying strategic positions if the market dips to 3200 – 3250 in S&P 500 or if the Fed shows signs of pivoting or if there is a marked improvement in inflation data.
- The foregoing excludes the momo crowd. Realistically, the momo crowd cannot be excluded because the momo gurus and the momo crowd are a force to be reckoned with. When it is all said and done, in the short term, the stock market goes up when there is net demand for stocks. The momo crowd is a big source of demand for stocks right now.
- The momo crowd is convinced that this is their opportunity to buy as they believe that the stock market is heading towards S&P 500 4500 – 4800.
- You already know that momo gurus are very skilled at twisting any new development into a reason to buy stocks.
- If any of the four critical days described above produce even the slightest of positive data, momo buying will become extremely aggressive. For example, it is a matter of common sense that the Fed cannot keep on increasing rates by 75 basis points at every meeting. The Arora Report call is that the most probable terminal rate is around 5%. This implies that after a 75 basis point hike in this meeting, the Fed may hike by only 50 basis points in the next FOMC meeting. Remember the rates will still be going up and they are likely to stay up for a while and Wall Street’s earnings estimates are too high. However, imagine what the momo crowd will do if on November 2nd the Fed were to say or imply that in the next meeting the rate hike will be data dependent – a perfectly logical thing to say. Imagine how momo gurus will twist this information and how aggressive momo buying will be.
- The answer to the important question is clear when the momo crowd is not included in the analysis. When the momo crowd is included in the analysis, the answer becomes murky for the short term because the momo crowd does not do analysis and momo gurus’ sole job is to run up the stock market.
- To balance the two opposing forces with the macro and fundamental on one side and the momo crowd on the other, protection bands were changed to deploy more cash and reduce hedges last week. More changes may be made as more data comes in. In the meanwhile, investors may want to consider adjustment within the protection bands based on their personal preference and the foregoing discussion.
- Two notes of caution:
- Start with Arora’s Second Law of Investing and Trading, “Nobody knows with certainty what is going to happen next in the stock market.”
- Run away from anyone who claims they know for sure what is going to happen next.
- As an actionable item, start within the protection bands and Arora’s Third Law of Investing and Trading, “Making investing and trading decisions based on probabilities is the only realistic and profitable approach.”
Meme Crowd
As a result of significant hype over the weekend, the meme crowd is 🔒 (To see the locked content, please take a 30 day free trial) meme stocks in the early trade, such as GME, BBBY, AMC, and KOSS.
Brazil
In Brazil, Lula won over Bolsonaro by a narrow margin. Lula is a leftist but was very pragmatic and investor friendly during his prior eight years when he led Brazil. Moreover, Bolsonaro has a significant presence in Brazil’s legislature and none of the left’s radical agenda is likely to pass.
There may be a major opportunity in Brazil if Bolsonaro’s supporters accept the election results. Brazil is a commodities powerhouse and one of the major untapped opportunities for investors with a long time horizon. The Arora Report has continuously covered Brazil for the last 15 years in ZYX Emerging.
China
Manufacturing PMI came at 49.2 vs. 50.0 consensus.
Services PMI came at 48.7 vs. 51.9 consensus.
A PMI of less than 50 indicates economic contraction.
These numbers indicate that the Chinese economy is weakening. Momo gurus in the U.S. are already using this data to come up with a new narrative that this weak data will force PBOC to be more accommodating and in turn influence the Fed in the U.S. to slow down.
Momo Crowd And Smart Money In Stocks
The momo crowd is 🔒 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
Bitcoin is seeing light buying and staying above $20,000.
Markets
Our very, very short-term early stock market indicator is 🔒 but can quickly turn 🔒. 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 $1641, silver futures are at $19.06, and oil futures are at $86.55.
S&P 500 futures resistance levels are 3950, 4000, and 4200: support levels are 3860, 3770, and 3630.
DJIA futures are down 152 points.
Protection Bands And What To Do Now?
It is important for investors to look ahead and not in the rearview mirror.
Consider continuing to hold 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.
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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.
