MONEY RUSHING INTO TECH STOCKS – DEUTSCHE BANK DAMPENS THE SENTIMENT – FED BALANCE SHEET EXPANDS

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By Nigam Arora & Dr. Natasha Arora

To gain an edge, this is what you need to know today.

Rush Into Tech Stocks

Please click here for a chart of Nasdaq 100 ETF (QQQ).

Note the following:

  • Money has been rushing into tech stocks for the following reasons:
    • There is a buying frenzy over artificial intelligence.  It is true that fortunes will be made in artificial intelligence over the next seven years.  However, many investors are going to end up losing their shirts.  Investors need to develop deeper knowledge of how to invest in artificial intelligence and be patient as well as systematic with investments in artificial intelligence.  Chasing prices is a recipe for losses.  To develop deeper knowledge, listen to the podcasts on artificial intelligence in the Arora Ambassador Club.
    • Interest rates are rapidly falling.  This is positive for tech stocks.
    • Gurus who were issuing calls to sell tech stocks near the recent lows are now switching to give calls to buy tech stocks near the highs.
  • Prudent investors should take a look at the chart.  The chart shows that QQQ moved right up to the top band of the resistance zone and is now backing off.  Technically, this is not a good place to buy tech stocks.  You want to buy either on a pull back or on a decisive breakout above the resistance zone.
  • RSI on the chart shows that QQQ is overbought.  Again, this is emphasizing that this is not a good place to buy tech stocks.
  • The credit swaps of big German bank Deutsche Bank (DB) are spiking.  Credit default swaps are a type of insurance against default for bond holders. It appears that the root cause for the concern is the wipe out of $17B of bonds by the Swiss government in the shotgun wedding of UBS (UBS) and Credit Suisse (CS).  Regular readers of The Arora Report had an advanced warning.  We wrote on March 20 in the Morning Capsule:
  • If regulators know of something really bad that is not publicly known, typically in such a buyout the stock is wiped out and bonds are converted to stock.  Here, the stock has been given some value, but $17B of bonds have been wiped out.  This is not how it normally works.  Here is the key question: Why did Swiss regulators force the complete wipeout of these so-called tier 1 bonds, also known as contingent convertible bonds or CoCos?

    • CoCos were a tool used after the 2008 financial crisis to transfer risk from taxpayers to bond holders.

    • CoCos have been a popular investment product believed to be a safe investment.

    • Who is holding these bonds and will that lead to a contagion?

    • More than $254B of such bonds are outstanding.  Who holds these bonds and how will the holders of these bonds react to a complete wipeout? It is believed that these bonds are owned by banks, insurance companies, pension funds, and individual investors.

  • Deutsche Bank stock is down about 8% in the premarket as of this writing.  This is dampening the sentiment and causing a broad selloff in stock futures in the premarket.
  • The momo crowd is aggressively buying the dip.
  • The Federal Reserve’s balance sheet grew by $94B over the last week.
  • Two-thirds of the systematic quantitive tightening by the Fed has now been erased by bank borrowing from the Fed in a matter of two weeks.
  • Just released durable goods orders are weak.
    • Durable goods came at -1.0% vs. 1.6% consensus.
    • Durable goods ex-transportation came at 0.0% vs. 0.3% consensus.
  • Treasury yields are rapidly falling.
    • The two-year Treasury yield has fallen to 3.63% as of this writing.  Compare this to over 5% on March 8, 2023.
    • The 10-year Treasury yield has fallen to 3.31% as of this writing.  Compare this to over 4% on March 2, 2023.
      • It is of special concern that the 10-year yield has fallen below the support at 3.40%.
  • The action in bonds is very concerning as it is predicting a recession.
  • Looking forward, the difference between the predicted Fed funds rate on January 24, 2024, and what the market is discounting is 124 basis points.  In plain English, the market is predicting a 1.24% rate cut by the Fed. 
  • We shared with you in yesterday’s Afternoon Capsule that Yellen was testifying after having moved stocks twice.  Yellen said that the government will take strong action to protect bank deposits.
  • As an actionable item, the best way to handle market conditions is to follow the protection band.  Please scroll down to see details.
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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

Gold futures have crossed above the psychological resistance level of $2,000.  

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

Oil fell this morning on recession fears.  However, as of this writing, the momo crowd is 🔒 the dip in oil.  Smart money is 🔒 in the early trade.

For longer-term, please see oil ratings.

Bitcoin

The whales are managing to levitate bitcoin.  Mom and pop are rushing to buy bitcoin on expectations that the whales will take advantage of the low liquidity on Friday night and run bitcoin up to $30,000.

Markets

Our very, very short-term early stock market indicator is 🔒.  Remember, today is a Friday.  Short squeezes tend to occur on Fridays.  If a short squeeze starts, the stock market can move up rapidly.  On the other hand, banking jitters may develop before the weekend.  If such jitters expand, a major selloff in the stock market can take place.  It all comes down to market mechanics.  It is important not only for short term traders but also for long term investors to understand market mechanics.  There are several podcasts on market mechanics in the Arora Ambassador Club.  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.

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Interest rates are ticking down, and bonds are ticking up.

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 $2003, silver futures are at $23.56, and oil futures are at $68.23.

S&P 500 futures are trading at 3952  as of this writing.  S&P 500 futures resistance levels are 4000, 4200, and 4318: support levels are 3950, 3860, and 3770.

DJIA futures are down 273 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 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.

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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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This post was just published on ZYX Buy Change Alert.

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Nigam Arora

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

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.

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