By Nigam Arora
To gain an edge, this is what you need to know today.
Unrealistic Expectations
Please click here for a chart of healthcare ETF (XLV).
Note the following:
- As a reminder, The Arora Report is politically agnostic. Our sole job is to help investors generate high risk adjusted returns.
- The momo crowd is now betting Democrats have magical powers to fix healthcare, housing, and everyday living expenses. Here are the realities investors should not overlook:
- Unlike periods when one party controlled the White House and both chambers of Congress, this time Democrats do not have a free run. President Trump is still the president, and the Constitution gives him veto power.
- Neither party has a magic wand to make massive federal deficits and the national debt disappear.
- The momo crowd may soon discover that political promises are much easier to make than to deliver.
- At this time, it is especially important for prudent investors to separate their politics from their investing.
- The chart shows the move up in healthcare ETF XLV on the midterm election results.
- RSI on the chart shows XLV is overbought. Overbought ETFs are susceptible to a pullback.
- XLV is up 22.5% year-to-date. In contrast, AI king Nvidia (NVDA) is up only 7.3% year-to-date. This simple observation illustrates the power of diversification and properly structuring a portfolio. As a full disclosure, XLV is in the ZYX Allocation Model Portfolio and NVDA is in ZYX Buy in the Core Model Portfolio.
- The stock market’s new narrative is an apparent belief that Democrats have a magic cure for consumers struggling with healthcare, housing, and everyday living expenses. The momo crowd is aggressively buying stocks that stand to benefit assuming Democrats will be able to deliver on their campaign promises.
- Insurance stocks are rallying on hopes that Democrats will protect Medicaid, restore healthcare subsidies, and expand insurance coverage. Examples of stocks being bought are Centene (CNC), Molina Healthcare (MOH), and Oscar Health (OSCR).
- Hospital stocks are rallying on the assumption of more insured patients and fewer unpaid bills. Examples of stocks being bought are Tenet Healthcare (THC) and HCA Healthcare (HCA).
- Homebuilders are rising on hopes that Democrats will make housing more affordable, bringing buyers back into the market. Examples of stocks being bought are D.R. Horton (DHI) and KB Home (KBH).
- Retailers and consumer discretionary stocks are gaining on expectations that consumers will have more money to spend. Examples of stocks being bought are Walmart (WMT), Dollar General (DG), and The Kroger (KR).
- In the middle of the momo crowd’s uber bullishness about Democrats’ magic cure, prudent investors need to separate reality from wishful thinking. In The Arora Report analysis, here are the key points:
- More subsidies may help consumers and hospitals, but they do not lower the underlying cost of healthcare. Someone still has to pay.
- Democrats cannot wave a wand and lower mortgage rates, construction costs, or home prices. Building more homes takes years.
- More government assistance may boost spending, but it does not make groceries, insurance, or other necessities cheaper.
- Putting more money in consumers’ pockets without increasing supply can push prices even higher.
- More spending without offsets could push Treasury yields higher, making mortgages even less affordable.
- Lower prices for consumers can mean lower profits for businesses. The momo crowd seems to be overlooking this conflict.
- Some companies will genuinely benefit from policy changes while others are simply being bid up on hopes that may never materialize.
- In The Arora Report analysis, investors blindly chasing campaign promises may be making a costly mistake. History tells us that campaign promises and governance are two different things.
- The momo crowd’s belief in Democrats’ ability to deliver on campaign promises is bifurcating the AI trade. Investors are buying hyperscalers such as Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG, GOOGL), while selling semiconductors, data center equipment suppliers, and power companies. Examples of stocks being sold are Micron (MU), Advanced Micro Devices (AMD), Intel (INTC), Vertiv (VRT), and Vistra (VST). Unlike some of the other post-election trades, this one has some basis, but both buying and selling are overdone:
- As we shared in yesterday’s Morning Capsule, restrictions on new data centers make existing data centers more valuable.
- Microsoft, Amazon, and Alphabet have a major advantage. Their existing infrastructure becomes more valuable and harder for competitors to replicate.
- Fewer new data centers could also mean less capital spending, better free cash flow, and reduced risk of overbuilding.
- Semiconductor companies, cooling and electrical equipment suppliers, and data center builders face the prospect of fewer orders.
- Smaller data center operators with heavy debt are especially vulnerable to construction delays.
- In The Arora Report analysis, the momo crowd is missing a simple fact that hyperscalers are the biggest buyers of semiconductors.
- As a member of The Arora Report, you have been ahead of the curve. We have been sharing with you our analysis that semiconductor supply and demand may come into equilibrium in 2028.
- Also, as a member of The Arora Report, you have been ahead of the curve in that we have been sharing with you that physical AI is ahead – robots, autonomous vehicles, drones, and intelligent industrial machines. Physical AI could eventually use more semiconductors than today’s data centers.
- Initial jobless claims came at 189K vs. 197K consensus. This indicates that the employment picture is strong.
- The official jobs report will be released tomorrow at 8:30am ET and may be market moving.
- As an actionable item, the sum total of the foregoing is in the Arora Protection Band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the Arora Protection Band. The Arora Protection Band is one of the large number of unique edges that are available to members of The Arora Report.
Magnificent Seven Money Flows
Most portfolios are now heavily concentrated in the Mag 7 stocks. For this reason, to get ahead and get an edge, investors need to dig below the surface of the Mag 7 stocks. It is equally important to rise above the noise of daily news on the Mag 7 stocks. The best way to get an edge, dig below the surface, and rise above the noise of the daily news is to pay attention to early money flows in the Mag 7 stocks on a daily basis. When there is significant news in the Mag 7 stocks that rises above the threshold of noise and impacts your entire portfolio, it is covered in the main section above.
In the early trade, money flows are positive in Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOG), Meta (META), and Apple (AAPL).
In the early trade, money flows are negative in Nvidia (NVDA) and Tesla (TSLA).
In the early trade, money flows are neutral in S&P 500 ETF (SPY) and negative 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. Smart money is an important indicator but is only one of hundreds of indicators that go into determining the Arora Protection Band and signals. Please click here and here to understand how signals are generated.
Very Very Short-Term Indicator
The Arora Report’s proprietary 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.
Gold
The momo crowd is *** gold in the early trade. This is reflected in gold ETF (GLD), silver ETF (SLV), gold miner ETF (GDX), and silver miner ETF (SIL). 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 (BTC.USD) is seeing buying.
Markets
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.
S&P 500 futures are trading at 7732 as of this writing. S&P 500 futures resistance levels are 7733, 7795, and 7831 : support levels are 7626, 7541, and 7318.
DJIA futures are up 336 points.
Gold futures are at $4130, silver futures are at $52.82, and oil futures are at $89.34.
Arora Protection Band And What To Do Now
It is important for investors to look ahead and not in the rearview mirror. The proprietary Arora Protection Band from The Arora Report is very popular. The Arora Protection Band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.
Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding *** in cash, Treasury bills, short term fixed income, 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.
