By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Rotation
Please click here for a chart of Dow Jones Industrial Average ETF (DIA).
Note the following:
- The chart shows the Dow Jones Industrial Average (DJIA) broke out to a new all time high.
- The chart shows that the breakout is not convincing.
- RSI on the chart shows that DJIA is overbought. An overbought index tends to be vulnerable to a pullback.
- The chart shows that volume is not heavy on the breakout to a new all time high. This indicates a lack of conviction.
- The reason behind the breakout in DJIA is that a rotation is taking place into cyclical and interest rate sensitive stocks and away from tech stocks.
- Prudent investors should note as DJIA hit a new all time high, AI and semiconductor stocks were being hit.
- In The Arora Report analysis, this rotation is especially noteworthy because the momo crowd is aggressively buying AI and semiconductor stocks ahead of Nvidia (NVDA) earnings.
- Nvidia reports earnings tomorrow after the close.
- In The Arora Report analysis, aggressive buying by the momo crowd in NVDA and other AI stocks is being countered with selling from hedge funds and institutions. Prudent investors should note that it is not that hedge funds and institutions are negative on Nvidia. It is that they represent smart money. Smart money knows that Nvidia earnings is a risk event. The risk is both to the upside and the downside. As we have been sharing with you over the years, smart money tends to reduce risk ahead of events. In contrast, the momo crowd buys ahead of events because the momo crowd always has stars in their eyes and does not take risk into account.
- The options market is pricing in a 9% move after Nvidia earnings.
- The widespread belief among the momo crowd is that NVDA stock will go above $150 after the earnings. Such a move will represent about a 20% upside move.
- Nvidia is long from $12.55 in The Arora Report ZYX Buy Model Portfolio. This represents a gain of 896%. For analysis on what to do with NVDA stock, please read the separate post on NVDA in ZYX Buy dated August 21.
- The foregoing illustrates the need for optimum diversification. The easiest way to reach the optimum diversification is to follow The Arora Report Model Portfolios. You get the best results when you combine ZYX Buy, ZYX Allocation, ZYX Emerging, and positions in ZYX Short. The combination provides the optimum diversification by stocks and ETFs, asset classes, geography, strategy, time frame, and protection.
- Consumer confidence will be released at 10am ET and 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. The protection band is one of the large number of unique edges that are available to members of The Arora Report.
Germany
The German economy is no longer expanding. Germany is Europe’s largest economy.
Germany’s Q2 GDP contracted by 0.1% vs. 0.1% contraction consensus.
China
China is determined to become the world leader in autonomous vehicles. China has just issued 16,000 license plates for testing autonomous vehicles on designated public roads.
For investors, autonomous driving is the next big opportunity.
Magnificent Seven Money Flows
In the early trade, money flows are neutral in Microsoft (MSFT).
In the early trade, money flows are negative in Amazon (AMZN), Nvidia (NVDA), Alphabet (GOOG), Meta (META), Tesla (TSLA), and Apple (AAPL).
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 *** 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 *** 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 *** oil in the early trade.
For longer-term, please see oil ratings.
Bitcoin
Bitcoin (BTC.USD) is seeing a pullback along with speculative and 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 range bound.
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 $2545, silver futures are at $29.90, and oil futures are at $76.65.
S&P 500 futures are trading at 5618 as of this writing. S&P 500 futures resistance levels are 5622, 5748, and 5926 : support levels are 5500, 5400, and 5256.
DJIA futures are down 75 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.
